In line with its Vision 2024 to streamline tax collection, SARS will implement new systems for reporting trust distributions and donations to approved institutions

The South African Revenue Service’s Vision 2024 (see our previous article here) is to become a modern revenue authority informed by data-driven insights, self-learning computers, AI and interconnectivity between people and devices.

Vision 2024 anticipates a data analytics environment in which third-party data will be provided to SARS on a real-time monthly basis. Although there is still work to be done, Vision 2024 will improve efficiency in tax compliance, since assessments can be pre-populated with as much third-party information as possible. Income tax deductions through PAYE will also be more accurate through effective tax rates generated by SARS for each taxpayer, based on this third-party information.

Currently, banks, financial institutions (such as long-term insurers, retirement funds and collective investment schemes), medical schemes, attorneys, estate agents, and issuers of bonds, debentures and financial products are required to file third-party returns to SARS. These third-party returns are filed with SARS once a year after the end of the year of assessment and contain information on, for example, interest, dividends, or capital gains on disposals in the year of assessment which accrued to a taxpayer in that year.

SARS is in the process of engaging with stakeholders by requesting comments on draft Business Requirement Specifications (BRS) for:

• resident trusts to declare distributions and vesting amounts to beneficiaries using the new IT3(t) returns; and
• approved 18A institutions to declare details of donations through the new IT3(d) returns. 

Representative taxpayers of trusts to declare amounts vested or distributed to beneficiaries

Currently, trust distributions are not reported by third parties to SARS. There is usually a delay (sometimes years) between the time when taxpayers file their ITR 12/14 to SARS and the receipt by SARS of trust data filed through the standard ITR 12T process. This means SARS does not usually have independent data for verifying the beneficiaries of trust income, capital or assets. 

Under these circumstances, it is also impossible to pre-populate those taxpayers’ ITR 12s for auto assessments with their distributions or amounts vested from trusts.

In a recent meeting with tax practitioners and stakeholders, SARS outlined how it intends over time to pre-populate the entire beneficiary section of the ITR 12T with data from third parties. This cannot be done immediately because of the need to make legal and systems changes.

Over time, this information will be collected by third parties, who will provide data to SARS on amounts distributed or vested to trust beneficiaries monthly, using the standard IT 3 data flow. SARS proposes to use the ITR 12T and IT3(t) processes simultaneously, and eventually merge them into a single linked beneficiary system.

The representative taxpayers of resident trusts, who would be responsible for providing this information, would be the reporting persons (in many cases, it is a tax practitioner). Non-resident trusts, collective investment schemes, employee share incentive schemes and real estate investment trusts are excluded, for various reasons.

The proposals anticipate monthly reporting of any amounts vested or distributed, when there is activity, with a final report due at the end of February. It appears null reporting is also possible if there is no monthly or annual activity.

Approved 18A institutions to report donations 

In a recent stakeholder engagement meeting, SARS emphasized the need to have approved section 18A institutions file the new IT3(d) returns with information on donors and donation amounts. This is because there have been various abuses of the system, including misuse of PBO registration numbers and situations where section 18A receipts were used for donations which had not actually been made, or the PBOs did not exist or the entities were not approved as PBOs. 

The new reporting system ensures greater transparency and integrity in the section 18A donor deduction process. Donors can claim tax-deductible donations to an approved section 18A institution up to, generally, 10% of their taxable income. 

Approved section 18A institutions include government entities, public institutions (e.g. public schools and universities), PBOs engaged in welfare, health care or education (Part II of 9th Schedule public benefit activities), specialised agencies such as United Nations agencies (e.g. UN Children's Fund, UN Development Programme), and funding / conduit entities of the above institutions.

These institutions will be required to submit the new IT3(d) returns to SARS using different submission channels, depending on their size and governance complexities. As with the new trust return, SARS will prescribe the additional information requested in the new IT3(d) by public notice. 

Proposed submission channels by trusts and 18A institutions

The proposals anticipate that Phase 1 will enable submission of XML data through SARS eFiling (up to 20 records per submission), uploaded via HTTPS (21 to 50 000 more records), or via IBM Connect Direct (50 001 and above).

Phase 2 will see data reporting to SARS integrated with the third-party's financial IT systems in real time. Phase 2 is in line with the Vision 2024 data analytics environment with real-time data processing.

SARS’s efforts to obtain input from stakeholders on these new third-party submissions is most welcome. We anticipate that the public notice requiring third-party reporting from trusts and approved 18A institutions to be published in 2023.

Written by Joon Chong, Partner at Webber Wentzel