I am looking for help with a South African-based Discretionary Trust created by a South African tax resident but one of the beneficiaries a UK tax resident.
The UK tax resident has requested access to the Trust accounts to ensure correct calculation of tax but the Trustees have refused as they “do not feel comfortable sharing the accounts”. I am trying to understand what legal obligations South African trustees have (can they refuse to give a beneficiary access to the accounts/relevant financial information to correctly calculate tax?).
The only reason I can see that might cause an issue are 2 clauses in the Trust Deed which 1)state they are not required to have the accounts audited and 2)they are not bound to file any administrative accounts with any person except if required by law.
They are showing no inclination to help with assessing the allocation of distributions from capital/income, so calculating UK tax correctly will be challenging. Any thoughts and guidance appreciated.
Do you mean that the Proper Law of the trust is that of South Africa? This is what determines the rights of beneficiaries and obligations of trustees. If it is RSA law it may be very different to English law. My university studies are distant but in 1967 the position was that RSA had no law of trusts and had borrowed little from English law, relying on Roman-Dutch legal principles of stipulatio alteri (lifetime) and fideicommissum (testamentary). Some jurists then thought that more should have been borrowed! For a 2022 summary https://oo.cdn.ngo/media/documents/oo-briefing-introduction-to-trusts-in-south-africa-2022-11_.pdf. There is a trust registration system https://www.justice.gov.za/master/trust.html
I had to do Roman Law for 2 years and have not had to use it much since but I remain an expert in freeing slaves by mancipatio.
In English law and in countries inheriting it the beneficiary is entitled in principle to a great deal of information about the trust. The final arbiter of exactly what is the Court. A leading case is Schmidt v Rosewood Trust [2003] 2 AC 709] where Isle of Man law applied. I know from experience that it has been followed in the Cook Islands. The Court is extremely sceptical of trust instrument provisions excluding beneficiaries, even mere discretionary objects, from information, as an aspect of their reluctance to allow ouster of their jurisdiction. Accounts not readily available may not be ordered routinely if answers to questions will suffice. You seem to have the trust deed. Does it say anything specific?
You are right to be concerned about HMRC. They are aware of the difficulty of obtaining info from foreign trustees. In all cases they expect a beneficiary to take reasonable steps to acquire it. My experience was that they would only go further if they suspected tax avoidance by the settlor. In such cases they might threaten assessments on the beneficiary unless he took legal advice locally and, if so advised, action against the trustees. Subject to what emerged, if anything, they might bully him into a negotiated contract settlement against the threat of assessment plus litigation. They are mainly interested where the beneficiary is known to have received something or has a known legal right to do so. I have never known them use their Treaty rights to seek information from the other tax authority (Article 25 South African Treaty) outside of suspected avoidance or evasion; not just to assist the UK taxpayer with UK routine compliance obligations.
Your starting point is surely to ascertain what UK tax liabilities the beneficiary might be exposed to given his status per the trust deed. I assume HMRC have not yet joined battle and given some hints. Then make a formal request of the trustees for relevant information in lay persons’ terms on the assumption they have no UK technical tax knowledge and won’t want to buy it in. If you draw a blank you will have to consider taking local advice and professional assistance. Advice may even be available in the UK or via it to linked firms in the RSA.
My comments on the 2 clauses in the trust deed would be as follows:
The Trustees can not rely on these clauses to refuse to provide information to parties connected in some way to the trust, such as beneficiaries. The Trustees have both a common law ( Roman-Dutch) and statutory fiduciary duty towards the beneficiaries to manage the trust assets according to the Trust Deed and equally important, to act in the best interests of the beneficiaries.
A formal request to the trustees to therefore disclose information to a beneficiary regarding the affairs of the trust, must be complied with, failing which, the beneficiary may direct a complaint to the Masters Office or if that leads to nothing, then apply to Court for an order to compel the Trustees to disclose the information.
If the refusal of the Trustees to disclose such information, is either not based in law or without proper reason, an aggrieved party may additionally ask the court to remove the trustees from their position or make a pecuniary cost order against an individual trustee, based upon the premise that such refusal may cause financial or legal harm to the beneficiary, where the beneficiary has his/her own legal obligation, ie to declare taxable income. This legal obligation on the beneficiary, also supports the premise that the beneficiary is by definition of this term in law, entitled to ask this information from the trustees.
I would suggest that the starting point should be to formally ask the Trustees to furnish reasons why they refuse to share the information and if they rely on any legal principles/legislation/case law that supports their decision and if so, to provide details of this.
Also note that even if one accept that the accounts do not need to be audited, it does not mean that the trustees either dont need to do accounts at all or file those accounts with the SA Revenue Service( SARS).
Since March 2023, all SA Trusts must register for income tax and lodge tax returns, known as a “ITR12T”. The return asks comprehensive questions, not only about the type of trust, but also about all the connected parties, particularly, the beneficial owners. You will find on the SARS website a “Comprehensive Guide to the Income Tax Return for Trusts”, where section 17 on page 56 requires details of the “person or beneficiary to whom income, capital or assets were distributed”, as well as all the financial information relevant to that distribution.
The trustees are also required to submit all supporting documents, Annual Financial Statements, as well as Minutes to Meetings and Resolutions.
In conclusion, should the Trustees not change their stance when reminded about their fiduciary responsibilities, I would suggest to consult a South African attorney to take this further.
Following Jannie’s expert contribution I would reiterate that my expectation is that HMRC, being either already there or entirely astute to ascertain this position, will want the trustees to take all reasonable steps to obtain any info HMRC reasonably require, with the leverage of an estimated assessment unless.
Just as a follow up, the South African trustees chose to seek legal advise after initially refusing to share the accounts - today they (reluctantly) confirmed the advice was to share the accounts (with all beneficiaries).