Investigating the use of trusts in tax avoidance and tax evasion practices in South Africa.

Abstract

Tax avoidance and tax evasion by trusts have long been a significant challenge for governments around the world, which also led to significant losses of revenue and undermining the integrity of the tax systems. As highlighted in the literature reviewed, trusts are being used to evade and avoid taxes. Over the past three decades, it has become clear that the trust institution have been misused by both the trustees and founders. The Trust Property Control Act No. 57 of 1988 ("the Act") is a combination of English, Roman-Dutch, and South African law, which provides the legal specifications for the creation and management of trusts in South Africa. According to the act, trusts must be created in writing and must provide a detailed description of the trust's objectives, beneficiaries, and assets ("Trust Property Control Act No. 57," 1988). The taxation of trusts in South Africa is primarily governed by Section 25B of the Income Tax Act No. 58 of 1962, which determines how trust income is taxed, either in the hands of the trust or its beneficiaries depending on the circumstances, meanwhile, (Sections 80A to 80L) of the same Act addresses tax avoidance practices. This study investigated ways in which trusts are used for tax evasion and tax avoidance and explores the underlying factors leading to such practices in South Africa. The study also investigates the systems and methods used to detect tax evasion and tax avoidance by trusts and analyses strategies that can be used to prevent tax evasion and avoidance by trusts in South Africa. The study employed a scoping review to analyse existing literature on tax avoidance and tax evasion practices by trusts in South Africa. The study reviewed papers published in peer-reviewed journals and dissertations that analysed the use of trusts in tax evasion and avoidance practices. Studies were pooled from Google Scholar, ResearchGate, Google, ScienceDirect and published reports. The Trust Property Control Act of 1988, which regulates the control of trust property, and the Income Tax Act of 1962, which governs tax obligations, were also examined for their implications on trust management and taxation. The observation period for the study spanned from 2000 to 2024. The findings from the scoping review suggested that the complexity of trust laws and the loopholes in the Income Tax Act create opportunities for tax avoidance. Trusts use discretionary and offshore structures, capital gains tax planning, and conceal income and assets to evade and avoid taxes. The complexity of tax laws, behavioural factors, regulatory issues, corruption, and economic incentives contribute to tax evasion and tax avoidance by trusts. To enhance clarity and ease for taxpayers, the South African Revenue Service (SARS) is streamlining the Income Tax Return filing process for Trusts (ITR12T). The National Treasury has proposed new laws to prevent tax avoidance through trusts, particularly concerning low-interest or interest-free loans. The Financial Intelligence Centre (FIC) monitors trusts for suspicious activities related to money laundering and tax evasion. Trustees must maintain accurate records and report any suspicious transactions. Having an independent trustee may help deter abuse, but it does not guarantee that abuse will not occur. Implementing measures that require discretionary trusts to be taxed at the trust level, rather than allowing income to flow directly to beneficiaries, can reduce opportunities for tax avoidance and evasion. While trusts serve essential functions in estate planning and asset management, their potential for misuse necessitates ongoing oversight and legislative action. As the government seeks to improve its approach to trust taxation, it must strike a balance between allowing legitimate uses and prevent abuse in an increasingly complex and regulated environment.