Escalating penalties for non-compliant trusts

A major drive for the South African Revenue Service (Sars) under the leadership of new commissioner Johnstone Makhubu is to broaden the unsustainable narrow tax base.

Current figures show that just 13.2% of taxpayers are responsible for half of all personal income tax collected.

Listen/read: Stronger Sars: Makhubu promises continuity

The focus is shifting to non-compliance by provisional taxpayers, especially those who use trusts and receive income.

“We will continue to focus on how we get that extra rand, that extra billion, out of our compliance work,” Makhubu said in a recent Moneyweb interview.

The introduction of strict administrative penalties for trusts failing to submit tax returns underscores this strategy.

Phia van der Spuy, founder of Trusteeze, notes that the move signals Sars’s determination to close compliance gaps and recover lost revenue.

In the crosshairs

Latest statistics indicate that around 300 000 (testamentary and inter vivos) trusts are registered with Sars. However, it is estimated that only 180 000 have filed tax returns. The estimated tax gap because of this non-compliance is between R50 billion and R60 billion.

Sars started issuing final demands to trusts with outstanding returns for the 2024 and 2025 tax years in February.

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In March, it gazetted a public notice in terms of the Tax Administration Act (TAA) allowing it to impose monthly penalties on trusts for failing to submit the 2024 and 2025 tax returns. The filing deadline arrived on 4 May.

Read:
Sars set to finally draw the line on persistent trust non-compliance
Trust tax deadline: Penalties for late filers
Sars tightens its grip on tax penalties

The rollout of administrative penalties for the non-submission of these tax returns marks “a clear and deliberate” follow-through on Sars’s stated enforcement agenda, according to Tax Consulting SA.

“The legal mechanism has long existed under sections 210 and 211 of the TAA. What changed is that trusts are now firmly within its crosshairs,” the firm said in a statement.

The administrative penalty is automatically imposed on the assessed loss or taxable income, and ranges between R250 and R16 000 (depending on the income) per outstanding return per month – for up to 36 months or until the trustee rectify the non-compliance.

Van der Spuy advises trustees to focus on the 2024 and 2025 tax returns and to submit them as soon as possible to avoid continued penalties.

Once the returns are submitted they should start focusing on other outstanding tax returns to prevent futures penalties.

“Trustees, accountants and other trust service providers should take Sars seriously and treat the trust as a vehicle that requires much more detailed compliance and paperwork than any other taxpayer,” she said in a short statement.

Enforcement through data

The revenue service has been upping its game when it comes to data collection and the use of third-party information. Sars is leveraging third-party information, transaction tracking, and inter-agency cooperation to strengthen its enforcement drive.

Read: Sars 3.0: How data and digital enforcement is reshaping tax debt collection

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In interviews since taking over from former commissioner Edward Kieswetter, Makhubu has reiterated this commitment to enhanced data use. He warns that where compliance continues to lag behind, Sars will heighten its integrated enforcement drive.

Tax Consulting SA notes that the penalty regime is “deliberately” structured to escalate pressure.

The fixed monthly penalty is not a once-off penalty. It is imposed monthly until compliance is achieved and may be levied for up to 36 months.

“In other words, procrastination compounds liability.”

Moneyweb awaits feedback on the amount raised in penalties following the May deadline, as well as the number of tax returns that were submitted and those still outstanding.

Tax Consulting SA adds that all trusts – active, dormant, or passive without assets – are required to register and submit annual income tax returns.

“There is no de minimis threshold, no inactivity exemption, and no tolerance for administrative neglect.”

Read: Sars tightens its grip on tax penalties

Van der Spuy earlier warned that Sars has been gathering information on the tax affairs of trust beneficiaries. She said it might be prudent to consider voluntary disclosure where the rules were not previously applied correctly.

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