Source: SARS’ Comprehensive Guide to the Income Tax Return for Trusts—External Guide, Revision 22, effective 12 December 2024
The date for Trusts filing season is 16 September 2024 to 20 January 2025 for provisional and non-provisional taxpayers. The annual notice, issued by the Commissioner, requires of all Trusts to submit a Trust tax return.
The purpose of this article is to provide an overview for the completion of the Income Tax Return for Trusts (ITR12T), list recent changes made by SARS, and the accompanying legislation.
A Trust is formed when the founder (also referred to as a donor or settlor) places cash or other assets under the administration and control of a trustee(s) to or for the benefit of a beneficiary(ies) or for a specified purpose.
Under the South African law, there are three types of Trusts:
i) Ownership Trust: A founder or settlor transfers ownership of assets or property to the trustees to be held in the Trust for the benefit of a defined or determinable beneficiary(ies) of the Trust. This type of Trust is commonly referred to as a discretionary Trust. This Trust can either be formed by agreement during someone’s lifetime (inter vivos) or by means of a Last Will and Testament (mortis causa).
ii) Bewind Trust: A founder or settlor transfers ownership of assets or property to beneficiaries of the Trust. The assets remain the property of the beneficiaries but are administered by the trustees (i.e., trustees are given control over the property). This type of Trust is commonly referred to as a vesting Trust. Similar to the ownership Trust, this type of Trust can also either be formed by agreement during someone’s lifetime (inter vivos) or by means of a Last Will and Testament (mortis causa).
iii) Curatorship Trust: The trustees administer the assets of the Trust for the benefit of a beneficiary that lacks the capacity to do so, for example, a curator placed in charge of a person with a disability.
In terms of Section 6(1) of the Trust Property Control Act, no person may act as trustee without proper authorisation from the Master of the High Court, where applicable. The Master of the High Court issues a Letter of Authority (LoA) authorising the trustees to act as trustees. The trustees may only act as such once the Master has issued the LoA, and any trustee action(s) prior to the LoA having been duly issued will be without authority.
Trusts may be described according to:
i) Their method of formation (inter vivos or mortis causa Trusts).
A) An inter vivos Trust is created during the lifetime of an individual.
B) A mortis causa Trust is created upon the death of an individual under that individual’s Last Will and Testament.
ii) The rights they confer on the beneficiaries (vesting and discretionary Trusts).
A) Under a vesting Trust, the income, capital gain, or assets of the Trust are vested in the beneficiaries, and the beneficiaries are said to have vested rights to the income or assets of the Trust. The beneficiaries are the true owners of the Trust capital and income, while the trustees are only empowered to administer the Trust fund.
B) Under a discretionary Trust, the trustees usually have the discretion as to whether and how much of the income or capital of the Trust to distribute to the beneficiaries. In these circumstances, the beneficiaries merely have contingent/discretionary rights to the income or capital of the Trust (note: it is also not uncommon to find hybrid rights within a Trust – this means that one Trust instrument may include vested and discretionary rights).The purpose of the Trust (e.g., estate planning, trading Trust (business Trust), asset protection Trust, charitable Trust, or special Trust).
WHO MUST COMPLETE AND SUBMIT THE ITR12T
a) A Trust is a “person” for tax purposes and is therefore a taxpayer in its own right. The ITR12T must be completed and submitted by the trustees of the Trust, or the tax practitioner appointed by the trustee(s).
b) The following special Trust types are recognised for tax purposes:
i) Special Trust—Type A—means a special Trust referred to in paragraph (a) of the definition of “special Trust” in Section 1 of the Income Tax Act. This Trust is created solely for the benefit of one or more persons who are relatives of the founder and who have a disability as defined in Section 6B (1) and such disability incapacitates the person(s) from earning sufficient income for their maintenance or from managing their own financial affairs.
A) To be classified as a Special Trust—Type A, approval must be obtained from SARS.
B) A Trust will cease to be a Type A Trust from the beginning of the year of assessment during which all the beneficiaries with a disability (for whose sole benefit the Trust was created) become deceased.ii) Special Trust—Type B—means a special Trust referred to in paragraph (b) of the definition of “special Trust” in Section 1 of the Income Tax Act. This Trust is created in terms of the Last Will and Testament of a deceased person solely for the benefit of beneficiaries who are the deceased person’s relatives, who are alive at the time of death of the deceased, and the youngest is under the age of 18 at the end of the year of assessment (also note the definition of the term “relative” that includes relatives in the third degree of consanguinity in relation to the beneficiary).
iii) Collective Investment Schemes: A scheme, in whatever form, including an open-ended investment company where members of the public are invited to invest money or other assets in a portfolio, and in terms of which two or more investors contribute money and hold a participatory interest in a portfolio of the scheme through shares, units, or any other form of participatory interest. The investors share the risks and the benefits of the investment in proportion to their participatory interest in a portfolio of a scheme or on any other basis determined in the deed.
The Income Tax Act distinguishes between the following types of collective investment schemes:
i) A portfolio of a collective investment scheme in securities;
ii) A portfolio of a collective investment scheme in property;
iii) A portfolio of a collective investment scheme in participation bonds;
iv) A portfolio of a declared collective investment scheme; and
v) A portfolio of a hedge fund collective investment scheme.
The following should be noted when registering collective investment schemes for tax purposes:
➢ A portfolio of a collective investment scheme in securities must be registered with SARS as a Trust for Income Tax purposes.
➢ A portfolio of a Collective Investment Scheme in property that qualifies as a REIT must be registered with SARS as a company for Income Tax purposes.
2024 FILING SEASON ENHANCEMENTS
With the 2024 legislative changes, the new fields for completion purposes have resulted in an enhanced income tax return for Trusts (ITR12T):
i) Section 12BA of the Income Tax Act 58 of 1962—Enhanced deduction in respect of certain machinery, plant, implements, utensils, and articles used in the production of renewable energy.
A) To enhance the attractiveness of the tax incentive to encourage greater private investment in renewable energy by temporarily enhancing the current renewable energy tax incentive available in Section 12B of the Income Tax Act.
B) Assets eligible for the enhanced renewable energy tax incentive would include:
I) Currently eligible renewable energy sources under Section 12B of the Act include wind power, PV solar energy, concentrated solar energy, hydropower to produce electricity, biomass compromising organic wastes, landfill gas, or plant material. However, there will be no electricity generation limits for the duration of this temporary incentive, as is with the current provision ofSectionn 12B. The enhanced renewable energy tax incentive will in addition apply to supporting structures as per Section 12B of the Act in which the above-listed assets are mounted on or are affixed to.
C) Time period for the enhanced renewable energy tax incentive
I) The tax incentive should be available for a period of 2 years and apply to qualifying new and unused assets brought into use for the first time on or after 1 March 2023 and before 1 March 2025.
D) Rate of depreciation for the enhanced renewable energy tax incentive
I) Businesses would be allowed an upfront tax deduction of 125 percent of the cost incurred with reference to eligible assets.
E) Eligibility for the temporary incentive
I) The taxpayer must be the owner of the asset referred to, and such asset must be used in the production of income. The lessor in the operating leasing arrangement will retain the right to claim the deduction in terms of Section 12BA.
F) Limitation of enhanced renewable energy tax incentive in respect of assets granted an allowance in terms of section 12B of the Act I) To ensure that there is no duplication of tax incentives in respect of the enhanced
renewable energy tax incentive, the legislation aims to clarify that taxpayers can deduct expenses incurred either in respect of section 12B or 12BA, but not both—in respect of assets brought into use during the two-year period. However, it should be noted that if the asset was brought into use prior to the set date, the taxpayer would qualify for both provisions on Section 12B (based on the progressive deduction) and Section 12BA for the new asset.
G) Interaction between enhanced renewable energy tax incentive in section 12BA of the Act and government grants
I) If a business purchases qualifying assets with a combination of their own funds and funding in respect of a government grant, the 12BA allowance will only be available in respect of the portion of expenditure incurred using the taxpayer’s own funds. This would mean that the deduction would be apportioned and not apply in respect of/against the amount received as a government grant.
H) Recoupment of enhanced renewable energy tax incentive
I) Where a taxpayer disposes of an asset on or before 1 March 2026 in respect of which an enhanced renewable energy tax incentive is granted, the amounts (a maximum of 125 percent of the cost of the asset) deducted under section 12BA of the Act will be fully recouped in terms of section 8(4)(a) read together with new provision section 8(4)(nA) of the Act.
I) ITR12T form changes include new and amendments to the following containers, to include the required changes:
I) Local business and trading income, including crypto assets (excluding rental income from the letting of fixed property and farming Income).
II) Income from Local Farming Operations (IT48).
III) Income from Local Partnership Farming Operations (IT48V).
Section 13quat of the income Tax Act 58 of 1962—Urban Development Zone (UDZ)
The tax incentive extension of the sunset date for a period of two years from 31 March 2023 to 31 March 2025.
Section 7C of the Income Tax Act 58 of 1962—Loan—Advances or credit granted to Trusts by a connected person
A) The exclusion for the acquisition of a primary residence be clarified by also including funding of improvements to the primary residence and by applying the limitations in paragraph 46 relating to the land on which the primary residence is situated.
B) Section 5 states that subsections 2 and 3 do not apply in respect of any amount owing by the Trust or company during the year of assessment in respect of a loan, advance, or credit referred to in subsection (1) if that Trust or company used that loan, advance, or credit wholly or partly for the purposes of funding the acquisition or improvement of an asset, and:
(i) The natural person referred to in subsection (1)(a) or (b) or the spouse of that person used that asset as a primary residence as contemplated in paragraph (b) of the definition of ‘‘primary residence’’ in paragraph 44 of the Eighth Schedule, where that primary residence and the land on which it is situated (including unconsolidated adjacent land) do not exceed two hectares are together used mainly for domestic or private purposes throughout the period during that year of assessment during which that Trust or company held that asset; and
(ii) The amount owed relates to the part of that loan, advance, or credit that funded the acquisition or improvement of that asset.
C) ITR12T form changes include a new question in the details of loan(s) granted to the Trust container. Section 25B of Income Tax Act 58 of 1962—Taxation of non-resident beneficiaries of Trusts
A) Amendments made to section 25B of the Act to align it with the provisions of paragraph 80 of the Eighth Schedule to the Act by limiting the flow through principle only to resident beneficiaries, which then means that “ALL” amounts vested (and subsequently distributed) to the non-resident beneficiary would be deemed to accrue to the Trust and be taxed in the hands of the Trust.
B) ITR12T form changes include new and amendments to local and foreign income containers.
C) This amendment will come into effect with the 2025 year of assessment changes.
Section 246 of Tax Administration Act No. 28 of 2011—Public Officer
A) A new question has been added to the form wizard to confirm that the person appointed as a trustee has not been disqualified.
Section 18A of Income Tax Act 58 of 1962—Donations
A) The donation questions have been updated to allow the taxpayer to enter up to 20 numbers of approved organisations that the Trust donates to.
B) New fields have been included: Name of entity/organisation.
Section12H of the Income Tax Act 58 of 1962—Learnership agreements
A) Amend the Learnership Allowance field under the Local Business and Trading Income including crypto asset(s) (excluding Rental Income from the letting of Fixed Property and Farming Income) container, specifically the special allowances not claimed in the income statement sub container from Learnership Allowance: Agreements in effect/completed in current year (Agreements entered into on or after 1 October 2016) to Learnership Allowance: Agreements in effect/completed in current year (Agreements entered into on or after 1 October 2016 but before 1 April 2024).
B) Also introduce a new field on the Tax Allowances/Limitations container, asking the taxpayer to confirm that the registered learnership agreement was entered into before 1 April 2024.
Further articles will discuss deductions, allowances, and limitations.