Trust AFS - CPD Consortium

0:00

S… Speaker 1 (Trust AFS - CPD Consortium)

developing a set of financial statements that hopefully can answer all those questions or provide that insight and information to solve so that you don't then sit with additional queries or please provide the following information.

0:16

S… Speaker 1 (Trust AFS - CPD Consortium)

So, as I say, what I've included in here is purely our practice documents that we've used over a span of, I want to say, probably the last 20 years that we've then refined and dealt with putting the pack together.

0:37

S… Speaker 1 (Trust AFS - CPD Consortium)

So very quickly from an agenda, we're going to have a look at the purpose of the financial statements and from whom they prepared, the disclosures and policy statements. Then we'll go through and have a look at a detailed statement disclosure. And I basically picked essentially the financial statement, the income statement, and then a couple of the notes.

1:03

S… Speaker 1 (Trust AFS - CPD Consortium)

What I think is quite important, although it's not applicable for the 26 tax year, is the changes to practice Note 31 and 11G and the impact that it has on financial. And maybe this is more relevant from the point of view that we're dealing with trust.

1:21

S… Speaker 1 (Trust AFS - CPD Consortium)

In that with the withdrawal and the streamlining and the narrowing in rather of 11G, having a look at the financial viability of maintaining trust where you have got just passive high income, passive trust of which you're distributing income out to beneficiaries.

1:46

S… Speaker 1 (Trust AFS - CPD Consortium)

With a few legacy assets, maybe it's then a situation where through revisiting of the cost benefits of keeping those structures, coupled with the increasing fiduciary compliance and reporting requirements.

2:02

S… Speaker 1 (Trust AFS - CPD Consortium)

And then I've put in takeaways, anomalies and some common traps in financial disclosures. It's just stuff that's come through past my desk and it's more of a reminder or a memory jogger. So having a look at the purpose of financials and from whom are they prepared.

2:27

S… Speaker 1 (Trust AFS - CPD Consortium)

So it's literally a legal accounting and fiduciary requirement. But foremost, they need to be practical, relevant, transparent, and they need to actually give a fair presentation of the trust capital that's represented by assistant administration.

2:46

S… Speaker 1 (Trust AFS - CPD Consortium)

And we've sat and debated in the form of a fair presentation in that normally the financial statements, by the time they go out, they're historic. So to put in fair value adjustments, I know within our practice there's a divide on the basis of whether in some instances we revalue and take into account the market-to-market valuation.

3:14

S… Speaker 1 (Trust AFS - CPD Consortium)

and in others is being maintained on a cost basis. And that's purely depending on what the client is seeking and the information and also the nature of the assets under administration.

3:29

S… Speaker 1 (Trust AFS - CPD Consortium)

From a fair presentation point of view, it's usually the beneficiaries want to ensure that the trustees are actually making the right decision and managing the investments on their behalf.

3:47

S… Speaker 1 (Trust AFS - CPD Consortium)

The fact that one is then using cost versus fair value adjustment, it doesn't mean that from an information point of view, that information cannot be provided as annexures or supporting documents. So to give you an example, if we work with a client where we work on a cost basis, so in other words, don't do the market-to-market valuation, when we do our sign-off pack,

4:16

S… Speaker 1 (Trust AFS - CPD Consortium)

If the portfolio manager is not involved in the sign-off meeting or is not part of a quarterly review meeting, for information purposes to the beneficiaries and the trustees, we always include a copy of the latest portfolio statement. My view is the set of financial statements, although they're there to, I'm going to say, check the trustees.

4:41

S… Speaker 1 (Trust AFS - CPD Consortium)

They're not necessarily the only format of assessing that or the only documentation. And in my view, keeping the financial reporting in the form of the accounting and the tax.

5:00

S… Speaker 1 (Trust AFS - CPD Consortium)

And the distributions to beneficiaries is separate then from how well the portfolio manager is doing and all the assets and administration. So as I say, it deals with the historic information, having a look at the cost to cost. It doesn't necessarily explain the tax implications for the beneficiaries.

5:21

S… Speaker 1 (Trust AFS - CPD Consortium)

So I've seen a number of financial statements where I've taken either taken over or I've been asked to do a trust audit and we've seen deferred tax provided for in the financial statements. Deferred tax is a tricky one or providing for...

5:41

S… Speaker 1 (Trust AFS - CPD Consortium)

assuming that the trust is going to be the sole taxpayer, again, it's on a case-by-case basis. You could be in the position where, with the conduit, should the trust terminate, the capital gains and income would then be declared to the beneficiary, so it's not a cost that the trust will be.

6:01

S… Speaker 1 (Trust AFS - CPD Consortium)

Or you could be in a position where you're not providing for it. And as we've had recently, where we've had the beneficiaries of our trust essentially immigrate, and now we've got the trust as the taxpayer. So again, by bringing in a deferred tax calculation, it's not necessarily the true position, given the various taxing.

6:29

S… Speaker 1 (Trust AFS - CPD Consortium)

anomalies or the various taxpayers that one can have. Then there's the non-user friendly cash flow statements, pages of policy notes and non-detailed notes. Again, as I've said, clients have asked why we put in this, this is the standard that we put in, but make sure it's relevant on the basis of does it actually provide the information that the users are looking for.

6:55

S… Speaker 1 (Trust AFS - CPD Consortium)

and I've dealt with the deferred tax question. The purpose of preparing them, as I say, is from a trustee point of view to see that there's proper accounting for the assets and liabilities that they're acting with due care, diligence and skill and just to keep accurate records.

7:15

S… Speaker 1 (Trust AFS - CPD Consortium)

accountability to the beneficiaries is understanding the financial position. And then I think probably from a beneficiary point of view is more the application of the income and capital. In other words, who's getting what? I think that has usually been a challenge on the basis of, especially if there's been loans made to one beneficiary or one child and not the other. It's always interesting to hear and see the comments.

7:44

S… Speaker 2 (Trust AFS - CPD Consortium)

from within the family members as to who's actually getting what.

7:50

S… Speaker 1 (Trust AFS - CPD Consortium)

With regards to the accountability to beneficiaries, I'm actually dealing with that matter now at the moment as to whether the beneficiaries have actually got a right to actually see the financial statements. I know I've had a client where he said, it's my funds, tell the kids they'll get it when I'm dead and gone, and what happens in my trust has got nothing to do with them. As you all know, that's...

8:15

S… Speaker 1 (Trust AFS - CPD Consortium)

From a control point of view, you need that division of control, and technically your beneficiaries are entitled to receive a copy of the financial statements, a copy of the trustee, and a copy of the letters of authority. Whether that information is provided, especially if you've got a...

8:42

S… Speaker 1 (Trust AFS - CPD Consortium)

willful founder that I leave to the clients then if I have been questioned and challenged and especially where there's been divorces in families and there's been spousal claims and that trust fund is always reviewed and had a look at.

9:05

S… Speaker 1 (Trust AFS - CPD Consortium)

Yes, I believe beneficiaries have got a right and entitled to it. It's just where their information is disseminated and their understanding of what the position is. I've had it in situations where, for instance, there's a grandfather in a trust and payments are made out to grandchildren and you've got a range of ages of grandchildren that each child or each grandchild eventually has.

9:35

S… Speaker 1 (Trust AFS - CPD Consortium)

He's or her education paid, but obviously the older child would have received far more than the younger child. If you look at it in a set of financial statements and you see that little Jolly has got more than Mary, it could create that family fictional dynamic. But what's not necessarily seen behind the scenes is maybe the trustees.

10:00

S… Speaker 1 (Trust AFS - CPD Consortium)

where it says that in the event of distribution, at the discretion of the trustees, to the best of their ability, please make sure that distributions are made equally to the beneficiaries, or more importantly, in the event of termination of the trust, again, just either equalise the distributions or keep...

10:24

S… Speaker 1 (Trust AFS - CPD Consortium)

Mary's education in that her costs won't have necessarily been incurred, keep those separate. So getting a set of financial statements and then understanding what is actually happening behind, there is an expectation gap.

10:41

S… Speaker 1 (Trust AFS - CPD Consortium)

My advice or my recommendation to clients is if you are sharing that information and on the face of it, there looks like there's favoritism or differing distributions, explain the rationale and the reason behind it.

10:59

S… Speaker 1 (Trust AFS - CPD Consortium)

The biggest one is obviously for staff. What are we doing? We're doing financials for staff, bottom line. Master's office if it's requested. And then also just good governance and risk management, tracking the capital versus the income. And the capital versus the income, I want to say, is becoming more and more relevant now at the moment. And I'm not sure if it's got to do with more clients or beneficiaries now going abroad, where at the end of the day,

11:28

S… Speaker 1 (Trust AFS - CPD Consortium)

especially if distributions are being made to beneficiaries who are in unfriendly tax jurisdictions. Let's have, for instance, like Australia, where as soon as there's the distribution that's received, it's almost taxable as income or straight taxable as income in the beneficiaries' hands.

11:53

S… Speaker 2 (Trust AFS - CPD Consortium)

becoming more of a requirement now to actually track as to what is clean capital, what is capital gains, and then what is the retained income. And I think that's more an international, I want to say requirement or international standards or processes that we're starting to need to follow given the global footprint of beneficiaries.

12:20

S… Speaker 1 (Trust AFS - CPD Consortium)

And then lastly, the commercial reasons. If you've got bankers and lenders, advisors, other stakeholders, if there's private equity within the fund, I normally find from a commercial reason point of view, a bespoke set of financials or management accounts are often asked for. And again, that's then done on a case-by-case basis as to who's looking for that information and what exactly is it that they are wanting.

12:48

S… Speaker 1 (Trust AFS - CPD Consortium)

For whom are they prepared? As I said, it's for your beneficiaries and you've got your income and your capital beneficiaries. And there's obviously a distinction between distributable income, which comes from your income sources, and then your capital beneficiaries want to see preservation.

13:09

S… Speaker 1 (Trust AFS - CPD Consortium)

Just a quick reminder to everyone that capital gains falls under capital. So although it's taxable in the form of the income tax calculation, it's actually attributable to the capital beneficiaries if there's a distinction in the trustee between income and capital beneficiaries.

13:30

S… Speaker 1 (Trust AFS - CPD Consortium)

The other one, and I know this is more of a trustee management or a trustee policy decision, is that where we've got differing income and capital beneficiaries, and you've got a portfolio that's managed where you're trying to generate income as well as give capital preservation, in our accounting policy notes, we do actually...

13:59

S… Speaker 2 (Trust AFS - CPD Consortium)

put in the details as to how we are accounting for obviously the standard as such but then in our trustees report we would then

14:11

S… Speaker 1 (Trust AFS - CPD Consortium)

put in as a note what the trustee strategy is with regards to the split or the focus between income and capital beneficiaries. With the idea then of giving beneficiaries that information that they're having to look at that, especially if there's second marriages and the wife is getting the income and the children will ultimately receive the capital.

14:39

S… Speaker 2 (Trust AFS - CPD Consortium)

there's always that friction as to what is what. And I will say we do put that in our trustees report. So the trustees report is not necessarily one that standard. We actually try and put in information to answer the beneficiaries.

15:00

S… Speaker 1 (Trust AFS - CPD Consortium)

questions as to how the trustees are actually, the decisions that they are taking with regards to policy decisions, obviously not necessarily the day-to-day decisions, those are done within resolutions. And then obviously the regulators and authorities and third parties.

15:21

S… Speaker 1 (Trust AFS - CPD Consortium)

So the view is to keep financials simple, practical, and bespoke. The trust property is basically silent on the form and content of financial statements. And then IFRS for SMEs often produces these...

15:37

S… Speaker 1 (Trust AFS - CPD Consortium)

extensive requirements, like I say, in the form of deferred taxation or equity or disclosures that need to be made as to what's tangible assets and amortization of intangible assets. So in practice, trust financials, it's a hybrid, basically between your legal substance and the accounting framework. So now what?

16:03

S… Speaker 1 (Trust AFS - CPD Consortium)

Looking at then the disclosures and the policies, which is basically what this presentation is about, is the approach that we've taken as a practice and the form of putting the financials together.

16:18

S… Speaker 1 (Trust AFS - CPD Consortium)

So they're not necessarily paid on a general purpose for all users. The most important is check your trust deed. I've seen financials where there's been a vesting versus discretionary. And remember, under vesting, that income is actually vested and due to the beneficiary at the end of every tax year.

16:41

S… Speaker 1 (Trust AFS - CPD Consortium)

And therefore, your accounting would then be completely different in that you would then move it to unbalance sheet as the debt owing to the beneficiary. Remember, investing then is different from your Section 7C or if you were then doing anything from a conjured perspective. So first point of course, look at your trust deed. Your trust deed, and especially if you've got some of the older trusts,

17:06

S… Speaker 1 (Trust AFS - CPD Consortium)

would then require an audit. And if that's then the full-on test function or whether it's a compilation or independent review, what's required. And then the other one is I've seen it, not frequently, but the approval of the financials by the beneficiaries as well. That's more in some of the older trusts.

17:33

S… Speaker 1 (Trust AFS - CPD Consortium)

My view is the beneficiaries are, the decision with regards to the approval remains with the trustees. So as I said, our approach is to do it on a bespoke case-by-case basis, like you have trading versus investment versus legacy property holding.

17:55

S… Speaker 1 (Trust AFS - CPD Consortium)

Also, just when I was looking at the comment now in connection with legacy property holding, and we've had the question recently in that in terms of the Trust Property Control Act, trustees are obliged to open a bank account. Now, if you've just got a legacy property holding and in terms of the trust deed, the expenses are paid for by the beneficiaries as a consequence of them using the property and you're just trying to keep contained costs.

18:25

S… Speaker 1 (Trust AFS - CPD Consortium)

as far as bank charges, et cetera, is concerned. And then I want to say also the FICA requirements, that if you've got a dormant bank account, usually after three months, it's closed. And then when you do want to activate it again, you go through the entire FICA process. I know you can't contract out of law as such. We're sitting with legacy property holding.

18:49

S… Speaker 1 (Trust AFS - CPD Consortium)

um obviously you've got the formation founding capital um trust capital um we always then um if you if we're in the instance where it's just the property then in terms of trustees resolution you say that that founding capital has either gone towards the initial setup cost um or it is then held um on um in nominee capacity by the trustees so

19:18

S… Speaker 1 (Trust AFS - CPD Consortium)

We have got instances where it's just a property without the bank account and we just carry forward essentially a dormant set of financial statements, but with the full complement as to what a dormant set, a full complement in terms of the standard as to what we have for a dormant set of financials or a property holding company as such.

19:44

S… Speaker 1 (Trust AFS - CPD Consortium)

Cherry-pick the accounting policies that you wish to adopt. So you can use efforts for SMEs as a guideline, but don't necessarily adopt the entire standard. And again, I come back to, yes, keep it simple.

20:00

S… Speaker 1 (Trust AFS - CPD Consortium)

must be a practical approach and the adaptation needs to work with the information that's required, the information that one wants to disclose. And I've added in here now at the moment with regards to, and we'll have a look at the retraction of practice note 31 and the introduction of 11G in that now,

20:26

S… Speaker 1 (Trust AFS - CPD Consortium)

just from an accounting perspective you've got more silos that one needs to account for as far as um and i want to say it's more your your tax calculation but where one then especially if your accounting team is not within the same firm as the tax compliance team you now need to actually provide

20:48

S… Speaker 1 (Trust AFS - CPD Consortium)

um as accountant you need to provide that information so let's have a look or we'll look at the the requirements um from a reporting point of view or an accounting point of view with 11g a little later

21:02

S… Speaker 1 (Trust AFS - CPD Consortium)

So the bottom line, the trust financials are not about compliance with the standard, but more about effectively reflecting the legal and fiduciary nature of the trust. The biggest technical risks are treating beneficiaries interest incorrectly, so a liability versus a reserve. As I said, come back and have a look to see whether there's vestedness such.

21:27

S… Speaker 1 (Trust AFS - CPD Consortium)

And if there's, let's say, for instance, the distributions in terms of the conjure principle that have been made that results in the 7C in that those loan accounts haven't been paid over yet, remember from a note point of view, and in terms of those 7C loan accounts, the payment of the funds is at the discretion of the trustees and not the beneficiaries.

21:56

S… Speaker 1 (Trust AFS - CPD Consortium)

But if you've got beneficiaries giving funder income, that payment terms might be then at the discretion of the beneficiaries. So again, be clear in what is the nature of that account, who's responsible for it, and what is the taxing implications, because that would then guide as to what your disclosures would be in the financials.

22:23

S… Speaker 1 (Trust AFS - CPD Consortium)

I'm blindly applying IFRIS, especially for the equity concept. I've seen financial statements with shared capital and distributions have been detailed as dividends.

22:37

S… Speaker 1 (Trust AFS - CPD Consortium)

ignoring the vesting and distribution distinctions, and then just poor disclosure of loans and related parties. Remember that related parties is becoming quite important now with regards to providing that information from a UBO perspective and also whoever's going to be completing the tax return and providing that information.

23:00

S… Speaker 1 (Trust AFS - CPD Consortium)

I've just thought of something I asked quickly in connection with from a disclosure perspective. I've had it before where I've had a call from a very irate beneficiary who said I'm sitting with my financial, these trust financial statements, thank you, and I see on your one line under trust taxation and says the trust has not provided for tax because it's got no taxable income.

23:26

S… Speaker 1 (Trust AFS - CPD Consortium)

I've just received a hefty bill because I've now received X amount out of trust distribution and why am I paying tax? So, again, from an information perspective, what happens within the financial statements and what happens then in beneficiaries' tax returns, there's a...

23:47

S… Speaker 1 (Trust AFS - CPD Consortium)

an expectation gap then as far as information is concerned. And again, I'm not sure I would put that within the financial statements. That needs to be maybe more as a trust resolution is to say these are the distributions that I've made and the taxing happens within the beneficiaries account. As far as the trust is concerned, it has no taxable income and therefore no provision for taxes being provided.

24:18

S… Speaker 2 (Trust AFS - CPD Consortium)

So then the next question comes on the basis of...

24:23

S… Speaker 1 (Trust AFS - CPD Consortium)

What is the report from an accounting perspective? What report do you prepare? Compilation report, independent review or an audit? So unlike companies where you've got the point system and determine the independent review, the starting point should be why are we preparing this set of financial statements? And if at the end of the day there's no legal requirement from a trust and it's...

24:48

S… Speaker 1 (Trust AFS - CPD Consortium)

You've got cost sensitivity and the financials are purely for the submission of the tax returns. Then using a simple compilation.

25:00

S… Speaker 1 (Trust AFS - CPD Consortium)

review or compilation report is perfect. If at the end of the day the trustees are looking for a slightly more assurance and especially if, for instance, there's structured finance involved and at some point in time the finance might have to be renegotiated or extended.

25:30

S… Speaker 2 (Trust AFS - CPD Consortium)

then an independent review is...

25:35

S… Speaker 1 (Trust AFS - CPD Consortium)

is then far more robust than as far as third parties are reviewing the documents. So again, if you've got trusts that have got complex beneficiary structures or multiple, or I want to say disputing beneficiaries, and there's also vested assets, then certainly I would then consider a little stronger.

26:04

S… Speaker 1 (Trust AFS - CPD Consortium)

review process and would then opt for the independent review. Independent review just providing a little bit more insurance than the compilation report. And then lastly, in connection with the test or the audit process.

26:25

S… Speaker 1 (Trust AFS - CPD Consortium)

For me, it's only at the moment under two instances, really, if there's a legal dispute that I've been escalated and as such, or if it's a trust deed requirement. And from a trust deed requirement point of view,

26:43

S… Speaker 1 (Trust AFS - CPD Consortium)

Other than, I'm trying to actually think of one instance, I think in 99.99% of the cases, the trustees opted then to change the trust deed and remove the audit requirement of the financial statement. So it's legally required if it's, as I say, a deed requirement or from a master's directive perspective. And then obviously if it's,

27:12

S… Speaker 1 (Trust AFS - CPD Consortium)

a PBO or a collective investment scheme, there might be a requirement. Contractually, again, that comes in on bank and lending requirements or investor funding. This would be private equity structures. And then if it's practically necessary, for instance, on the size and complexity, if there's related party transactions. And for me, the big one is then disputes.

27:40

S… Speaker 1 (Trust AFS - CPD Consortium)

or also cross-border transactions. Again, having said that, it comes back to management accounts or the purpose and the reason for it. So within the practice between compilation and independent review, we balance between those based purely on client sensitivity or cost sensitivity and requirements.

28:06

S… Speaker 1 (Trust AFS - CPD Consortium)

So as I say, if it's a SARS, we 99.9% use the compilation report. So looking at the detailed financial statements now, and as I said, for me, we're lucky on the basis that we have the accounting and the tax team all within the same practice.

28:29

S… Speaker 1 (Trust AFS - CPD Consortium)

There are a couple of scenarios where the accounting is done by traditional accountants and the tax is done by the trustees or other parties.

28:42

S… Speaker 1 (Trust AFS - CPD Consortium)

And as we all know now, last year or the last two years with completing tax returns, those tax returns require a fair amount of information and disclosure. And asking for a set of financial statements, a standard set of financial statements, is not necessarily going to answer all of those questions.

29:03

S… Speaker 1 (Trust AFS - CPD Consortium)

So you might have to then, as the accountant, provide supporting annexures in order for the tax compliance team to submit fair and accurate records.

29:19

S… Speaker 1 (Trust AFS - CPD Consortium)

Our starting point with regards to the index as such, and I just want to, this is an index of the summary that we put in. And yes, as much as I've said, that are necessary cash flows. I grew up in the era where we had, it wasn't a cash flow. It was, oh, for the love me, I can't remember now. It was the one before.

29:43

S… Speaker 1 (Trust AFS - CPD Consortium)

the cash flow statement. Sorry, I've just drawn a blank then as such, and I still can't balance the cash flow, I'm very embarrassed to say. So having said that, we still put all of these in within our set of financial statements.

30:00

S… Speaker 1 (Trust AFS - CPD Consortium)

calculated on a bespoke basis. So what we end up winning is obviously the decision as to what are the accounting policies that we follow.

30:09

S… Speaker 1 (Trust AFS - CPD Consortium)

If we've got just a legacy property holding company, obviously, and there's no movements, then we would obviously eliminate the cash flow statement of the income and maybe also just changes to the trust fund. And I want to put a question mark on that because there could be donations or movements then from a trust capital perspective.

30:35

S… Speaker 1 (Trust AFS - CPD Consortium)

let's just have a look and see we've got the general information i'm going to go through the general information in a bit of detail because we've extended that and i want to say it comes down to in some instances about three pages now at the moment

30:50

S… Speaker 1 (Trust AFS - CPD Consortium)

And I've had clients say, well, this is passing the thud test because you've got a, you know, and you put a page, I've got a whack of documents the size. It's not. It's actually just giving all the information that's either needed by the trustees in connection with the UBO, by the tax compliance officer in the form of related parties, UBO tax numbers.

31:17

S… Speaker 1 (Trust AFS - CPD Consortium)

who the beneficiaries, et cetera, are. So I'll go through the general information in a little bit more detail. We do put in the trustees' responsibility and approver, report of the compiler, this one's a compilation one, then report of the trustees. And in the report of the trustees, it's twofold. One of the bases that we do try and make it

31:42

S… Speaker 1 (Trust AFS - CPD Consortium)

Again, I want to say case by case, user friendly. It is information that the trustees want to get through to the beneficiaries without necessarily going through the resolutions that is then put into our trustees report.

32:01

S… Speaker 1 (Trust AFS - CPD Consortium)

a statement of financial position, obviously the balance sheet, income, trust capital, cash flows policies, the notes, and then there's the supplementary information, which is a detailed income statement, and then the income tax computation. And the income tax computation would then include the details of obviously non-deductible expenses, and then

32:29

S… Speaker 2 (Trust AFS - CPD Consortium)

In instances, we would then itemise the detail of the individual beneficiaries to whom income and capital gains have been distributed.

32:44

S… Speaker 1 (Trust AFS - CPD Consortium)

Let's go through the general information. We start on the basis of country of incorporation, South Africa, the trust registration number. Often then, which office is the trust registered, which master's office? We put in the income tax number. And if it's the trading trust, the BAT and the PAYE, then the type of trust. And the type of trust is your discretionary vested, inter-vivas or testamentary.

33:11

S… Speaker 1 (Trust AFS - CPD Consortium)

Nature of the principal activities, poverty holding, passive investment, trading, whatever the case is. Trustees, we actually put in the data what the current letters of authority are and then who the trustees are and then details of their founder. If the founder is deceased.

33:29

S… Speaker 1 (Trust AFS - CPD Consortium)

Again, just disclosing connection with that. I'm stopping there quickly on the basis that I've had the question in connection with the Papier Act in that we had one tax...

33:45

S… Speaker 1 (Trust AFS - CPD Consortium)

The tax person asked if we could actually put in all the IDs and all that information that was required in that he wanted to obviously use the set of financial statements for completing the IT12. We've been fairly mindful and careful on the basis of just disclosing all that information in the set of financial statements. He quite rightly argued that it's going into a tax return and you're preparing these financial statements only for staff.

34:14

S… Speaker 1 (Trust AFS - CPD Consortium)

Again, folks, do it on a case-by-case basis as to where this information is going and the extent of personal information you want to provide in the general information section.

34:28

S… Speaker 1 (Trust AFS - CPD Consortium)

Then we do make a note of the beneficiaries as defined in the trust deed. Now, I'm saying it's the one as defined in the trust deed because, remember, you can have, and I know certainly in connection with the UBO, the classes of beneficiaries have changed. So previously where you might have said mom, pop,

34:49

S… Speaker 2 (Trust AFS - CPD Consortium)

and detailed the names of the children or the grandchildren or whoever with regards to the UBO and the KYC requirements.

35:00

S… Speaker 1 (Trust AFS - CPD Consortium)

If a beneficiary was named or had received benefits, then those details were then required. We stick to, if that information is, it's in the body of the financials, we stick to this general information is almost the fiduciary.

35:23

S… Speaker 1 (Trust AFS - CPD Consortium)

set of information. It might not necessarily be what's happening under the scenes, but if you were going to take the first two pages from a fiduciary perspective, you should then get most of the information that you need or want regarding the trust.

35:41

S… Speaker 1 (Trust AFS - CPD Consortium)

So as I say, we only put in the details as defined in the trust deed and not necessarily referencing a clause. If they have been unnamed, if the trustee has got unnamed beneficiaries, but the class have received a distribution as a consequence of them being a grandchild and there's been a distribution, that would then be picked up in the notes to the financial statements.

36:10

S… Speaker 1 (Trust AFS - CPD Consortium)

Then an important one is who the main or representative trust is. I know that certainly from a compliance point of view has been a question that's been asked, I want to say, in the last two or three.

36:26

S… Speaker 1 (Trust AFS - CPD Consortium)

RT12s, and it's also asked if the J forms, if you're making any changes then to or making submissions to the master's office, who is the main representative trustee? Again, we put in the bankers. And then this is more just, again, a fiduciary thing. What was the UBO submission date and has it gone in? And then who's the compiler?

36:54

S… Speaker 1 (Trust AFS - CPD Consortium)

So as you can see, our first couple of pages are quite detailed on the basis of if the financials are being prepared for the trustees and the beneficiaries, then you've got a condensed view of what information is or what that information is.

37:20

S… Speaker 1 (Trust AFS - CPD Consortium)

Then your next one being the statement of the financial position. And remember, you've got trust capital, retained income, beneficiary distributions payable.

37:32

S… Speaker 1 (Trust AFS - CPD Consortium)

And those, at the end of the day, as I said, identify what is those that are carved out in terms of 7C because they are vested income but unpaid at the end of the year. But the repayment thereof, as I said, remember, must be at the discretion of the trustees or whether it's a vested trust of income and therefore all, you know, testamentary trust is the Section 4Q type trust and there's a vesting to the wife.

38:01

S… Speaker 1 (Trust AFS - CPD Consortium)

then those disclosures need to sit within the trust capital retained income in that always go on the basis and say that if you were going to draw a line and wind down the trust immediately, who are the first people that you've got to pay? And your vested beneficiaries then would essentially be primary from that side.

38:29

S… Speaker 1 (Trust AFS - CPD Consortium)

Looking then at your loan accounts, and those are loans from trust to beneficiaries and beneficiaries to the trust. And again, just have a look and see which ones are your interest billing, which ones are your 7C, and then which ones are your copped out 7C, but not your...

38:50

S… Speaker 1 (Trust AFS - CPD Consortium)

Conjured distributions, it's your, for instance, your primary residence funding. So mom and pop have got a trust and a portion of the funding is for...

39:04

S… Speaker 1 (Trust AFS - CPD Consortium)

the purchase of a primary resident and the balance then is for a share portfolio remember from a 7c perspective the element that relates to the primary residence is carved out but the funding that's gone towards the share portfolio is then subject to the 7c um and we within our notes again identify what is subject to 7c what is 7c but carved out and then what is just plain interest bearing um

39:34

S… Speaker 1 (Trust AFS - CPD Consortium)

I just want to, and from a question point of view, I'm often asked, well, how do you account for, what is your systems that you account for? We use a package as such for our larger clients, especially if there's a number, if there's a lot of banking transactions as such. Otherwise, we use...

40:00

S… Speaker 1 (Trust AFS - CPD Consortium)

Excel spreadsheet, and we have the number of tabs in the form of the bank account, the investment account, and especially from an investment account perspective where you might use different cost bases to what is in your portfolio statement. And I want to say there's probably two instances that you would do that where your, I want to call it your investment fixed asset register will then

40:29

S… Speaker 1 (Trust AFS - CPD Consortium)

need to be maintained by the accountants is if you've had section 42 transfers because remember if you put in a section 42 transfer your base cost is that that's carried over from the person transferring assets in as such but very often what's then put into the portfolio statement they bring in the

40:54

S… Speaker 1 (Trust AFS - CPD Consortium)

cost at the value, the market value in which it was then transferred into your portfolio. And therefore, when those assets are sold after the prescribed period, you can't use the IT, what's it, 3C. You've got to go back to essentially the initial cost base.

41:16

S… Speaker 2 (Trust AFS - CPD Consortium)

In our Excel sheet, we run a fixed asset register for investments on the basis of opening balance, plus or minus.

41:27

S… Speaker 1 (Trust AFS - CPD Consortium)

sell corporate actions, put in the rated average base cost. You could have some, and so that was the second one. The second instance would be if you're sitting with a bespoke share portfolio where there have been shares that have been on a number of years or held pre-2001 and therefore your

41:54

S… Speaker 1 (Trust AFS - CPD Consortium)

weighted average base cost, or you might do those shares on a specific ID basis. And then we actually run the, within the Excel sheet, we actually run those beneficiary loan accounts. Now, those beneficiary loan accounts are becoming more and more important because in terms of the 7C, with the queries that we've had from SaaS in the form of the supporting information, they're actually looking for the amortization schedule.

42:24

S… Speaker 1 (Trust AFS - CPD Consortium)

So it's no longer – one can't just say this is the opening balance, the closing balance, and calculate the interest in the closing balance at the end of the year to determine the 7C. It actually needs to be done on an amortized month-by-month basis. So doing it on, as I say, an Excel sheet is easy.

42:49

S… Speaker 1 (Trust AFS - CPD Consortium)

Certainly from historic information, the fact that we, within this Excel spreadsheet, carry forward the last, in some instances, the last three years, or if it's, depending on the transactions, there's not a huge amount of transactions. You've actually got the history of what's happened over the last number of years within the detail of the beneficiary accounts.

43:17

S… Speaker 1 (Trust AFS - CPD Consortium)

And that's always been helpful where a client comes back and says, I bought little Johnny a car all those years ago. How much did I spend? Because now I need to buy Mary a car and I want to know what I spent on, you know, spent for Johnny. So the fact that you've got detailed schedules and kept detailed schedules of beneficiary payments and the nature of what they, you know, the description of it, it actually makes life easy then.

43:47

S… Speaker 1 (Trust AFS - CPD Consortium)

A for the accountant, you're not sitting going back and from a trustee perspective that information is there.

43:54

S… Speaker 1 (Trust AFS - CPD Consortium)

So, as I say, I've got two accountants who are boss on Excel and we essentially do the calculations and it's become quite handy now on the basis that within our Excel workbook as such, we have the provisional tax return as well as then the final tax return and that's quite handy on the basis that

44:22

S… Speaker 1 (Trust AFS - CPD Consortium)

the provisional tax return right down to and my opening statement when we were starting to prepare for this i said i'm actually challenged but we've got a system where we have our resolution that's required by the trustees come the end of the year as to what is the percentages or the amounts that are distributed to beneficiaries that the trustees need to

44:50

S… Speaker 1 (Trust AFS - CPD Consortium)

make a decision before the end of the year for the provisional tax, that's included in our Excel workbook. So for me as a practice,

45:00

S… Speaker 1 (Trust AFS - CPD Consortium)

The Excel workbook works. Just make sure you've got proper backup from that point of view. Or if you've got styles, and that is another one I just want to say, remember if you change or add styles, then check your ad subs.

45:16

S… Speaker 1 (Trust AFS - CPD Consortium)

So the statement of financial position standard on the basis of financial assets, you've got a loan to the beneficiary, cash and equivalent. Cash and equivalent, again, we just put in the details as to one of the bank accounts, not necessarily their account numbers.

45:34

S… Speaker 1 (Trust AFS - CPD Consortium)

then trust capital, I'll sit and unpack trust capital for you. And I know when I was putting this together and I saw this accumulated loss, and trust should not have a loss. Unfortunately, this loss is purely on the basis of market-to-market calculations in here. So ideally, trust should never run and never have an accumulated loss.

46:02

S… Speaker 1 (Trust AFS - CPD Consortium)

This is purely a fair value calculation. Then you've got your financial liabilities and your trade and other payables.

46:11

S… Speaker 1 (Trust AFS - CPD Consortium)

So having a look then, and I'll go through some of the notes with you in the detail, our comprehensive income statement, again, just split between the interest, the rentals and the dividends. Expenses, we just do the operating, do it at a high level. It's a comprehensive basis. Net income distributions that are paid and vestings on loan account. In the distributions and the vestings, those might just be...

46:39

S… Speaker 1 (Trust AFS - CPD Consortium)

the one consolidated or the total figure, because again, in our notes, we would then say distributions paid, Johnny interest, Johnny rental, Mary interest, Mary capital gains for argument's sake. And then in the notes to the financial statements, it's got the underlying details.

47:00

S… Speaker 2 (Trust AFS - CPD Consortium)

Then, yeah, that's just the picture, and you can see our fair value adjustment.

47:12

S… Speaker 1 (Trust AFS - CPD Consortium)

Then with regards to the trust capital, basically, this is the residual interest. After you've taken your trust dust, it's minus your liabilities. But remember, it's also not held by the trust itself because it's essentially what's been administered on behalf of the beneficiaries. And that's where it comes in. And it's quite important as to what is the split between capital beneficiaries and income beneficiaries.

47:38

S… Speaker 1 (Trust AFS - CPD Consortium)

I want to say what's being vested because vesting as far as the trustee's concerned should be one of the fiduciary requirements to always make sure that I've got enough cash, if I'm wearing my hat on as a trustee, that I've got enough assets and cash that if at any point in time that beneficiary payment is required, it can actually be paid.

48:04

S… Speaker 1 (Trust AFS - CPD Consortium)

And when do those beneficiary payments, when are they required? That is in the event of a divorce, death or liquidation. And to that extent, as much as it is, let's say, for instance, at the discretion of the trustees as to when the payment is made, in those three scenarios, there's a draw on the trustees and you've got to have the cash in the back.

48:30

S… Speaker 1 (Trust AFS - CPD Consortium)

When I wear my hat as a trustee, I always make sure and do that back of the bag packet calculation to make sure that what I've got, and obviously because you're dealing with historical information, it's good to know and be in touch with regards to your investment statements. Just bear in the back of your mind that I've got an obligation to pay a vested amount to beneficiaries. Do I have those funds available?

49:04

S… Speaker 1 (Trust AFS - CPD Consortium)

So the trust capital, and this is the initial founding donation and the settled capital.

49:12

S… Speaker 1 (Trust AFS - CPD Consortium)

The settled capital would be that if it was a testamentary trust or where we've had instances where there's actually been a request out of a deceased estate to a trust, that would then come in as the, it can either come in as your request or a settled capital. Sorry, settled capital is actually your testamentary trust. If there's bequests, again, received from a deceased estate, we put that in as a separate donation.

49:39

S… Speaker 1 (Trust AFS - CPD Consortium)

or a separate amount rather but it's all shown under trust capital then you've got your capital growth and reserves which is essentially your capital profits and your fair value adjustment depending on the accounting policy then you've got your style of retained income and then under the retained income you would then reflect

50:00

S… Speaker 1 (Trust AFS - CPD Consortium)

your vested income and capital entitlement. So those are distributions that have been allocated, but not yet paid. Now, we also, depending on what your trust deed says, every two to three years, and if you ask me why, it's because we've always done that. And I want to say, and that's a really crappy reason to say or to do something.

50:25

S… Speaker 1 (Trust AFS - CPD Consortium)

But every two to three years, that's where I sit on or advise from a trustee point of view, we move the retained income, provided there's no income and capital beneficiaries, we move that retained income to trust capital purely on the basis of, as I say, what is the reason for doing it?

50:50

S… Speaker 1 (Trust AFS - CPD Consortium)

It was the way I was taught, it was the way it was done, and it's moved into trust capital. Has it got an effect as far as if you, especially if you've got beneficiaries, cross-border beneficiaries, where you need to keep income and capital separate? Don't do that. But we move trust capital every now and again, or we move return income rather into trust capital.

51:19

S… Speaker 1 (Trust AFS - CPD Consortium)

This then is on the basis of trust capital, fair value. Unfortunately, we've got this accumulated loss here in this stage and then the total.

51:29

S… Speaker 1 (Trust AFS - CPD Consortium)

And then we pick up the annual donation. So this is where either there's been, and remember, don't do the annual donation if you've got a Section 7C, because that annual donation goes against the interest component of the 7C, or you might have the unutilized portion. So let's say, for instance, the interest on the 7C comes out to $80,000.

51:58

S… Speaker 1 (Trust AFS - CPD Consortium)

you can then still do a 20,000 distribution of the capital amount and we do it then as a record. So although it's an accounting transaction and there might not necessarily be cash movement as such, it's documented as such and IT 144 is prepared for the 20,000 and there's an acceptance or donation and acceptance thereof.

52:25

S… Speaker 1 (Trust AFS - CPD Consortium)

Then within the trust capital, that's done on the basis of what are the annual donations and then what is our vested capital. And then you can see under the vested capital.

52:38

S… Speaker 1 (Trust AFS - CPD Consortium)

We've then got the note to say, and in this instance, it's only one beneficiary and it consists of unpaid distributions administered by the trust on behalf and payable at the discretion of the trustees. That becomes quite important because SARS wants that information or SARS wants to know that because that's then one of the requirements then for 7C.

53:00

S… Speaker 1 (Trust AFS - CPD Consortium)

And then within our notes, so just quickly coming back where we do our distributions paid, in our notes then we would then say to beneficiary one it was interest, to beneficiary one that was the element of capital gain. So as I say, within and unfortunately sometimes this note can be fairly long if you've got a number of beneficiaries.

53:31

S… Speaker 1 (Trust AFS - CPD Consortium)

And then usual noggin on the basis of saying, well, if it's too long, then put that as a supplementary annexure in the form of what income is being received by what beneficiary. And then I have started to put this in my financial statements because it's, again, something that SARS is starting to have a look at to say that the distributions are determined.

53:58

S… Speaker 2 (Trust AFS - CPD Consortium)

by resolution passed by the trustees at the end of the year, and then obviously have that resolution to back it up.

54:04

S… Speaker 1 (Trust AFS - CPD Consortium)

Now, I know we've dealt with distributions in the trust administration side. That resolution, it can either be done on the basis of percentages or it can be done on a random amount. For instance, if you're distributing the annual interest abatement or the capital gains amount to various beneficiaries. But essentially,

54:35

S… Speaker 1 (Trust AFS - CPD Consortium)

These figures might not necessarily tie in with the resolution because in this instance, I would know for a fact that we would then say in terms of the trustees, 100% of the interest and 100% of the capital gain goes to beneficiary one. Then the changes to the practice note 31 and 11G. And when Catherine and I were doing the...

55:00

S… Speaker 1 (Trust AFS - CPD Consortium)

prep and just making sure we were on point for this morning, Catherine quite rightly reminded and brought up practice note 37. And I've had my accountant come in and send some information to say, yeah, it's a good one from that point of view. And I think the question was whether that applies only to individuals. It says it was issued in 1995 and it uses the word taxpayers.

55:27

S… Speaker 1 (Trust AFS - CPD Consortium)

I want to say we are going to have a look at it definitely to make sure that from our trust perspective, we can have a look at passing that expense along to or attributed to the interest income. But be careful, folks, it says relating to the submission of the tax return. So to that extent, my first thought on the basis when my accountant then said, does that mean we've got to issue two separate fee notes? My aunt says no, still one fee note.

55:55

S… Speaker 1 (Trust AFS - CPD Consortium)

we're going to then have to identify what are the preparation of the financials and what then for the preparation of the tax return. So remember practice note 31. So although 30, I mean 37, remember 31 has now been or will be withdrawn from for years of assessment commencing after 1 Jan 2026. So it's basically for trust ending February 27 onwards.

56:24

S… Speaker 1 (Trust AFS - CPD Consortium)

the change is going to require, again, that silo accounting. So from an allowable deduction point of view, you're going to need to keep, as an accountant for the tax team then as such, the allocation then between...

56:42

S… Speaker 1 (Trust AFS - CPD Consortium)

And this is then of non, I want to say general expenses. So from a rental point of view, your direct expenses in the production of rental income still go and get deducted as such. This is more your accounting, compliance fees, bank charges, et cetera. A, you can't create a loss if the charges are greater than what the interest is.

57:10

S… Speaker 1 (Trust AFS - CPD Consortium)

It's then capped at the interest. And under practice note 31, you could then allocate the expenses. So a trust could then take a deduction for interest on borrowings and then obviously all these administrative trustee fees, bank charges, et cetera. Under the new 11G,

57:36

S… Speaker 2 (Trust AFS - CPD Consortium)

It's still a price broadly, but there's a narrower restriction. And now you're back to from an interest, having a look at what's deducted in terms of your 24J, and then those incurred to produce the interest income. It's again still limited to interest income. And then there's no deduction for non-interest expenses anymore, including the structuring costs.

57:59

S… Speaker 2 (Trust AFS - CPD Consortium)

So have a look at the, this for me is, you are going to end up having a high taxable position when your tax income is going to be higher than your accounting profit as such. And again, it comes back to having a look at the financial feasibility of keeping certain trust.

58:25

S… Speaker 2 (Trust AFS - CPD Consortium)

in place, especially if they are income producing portfolios. Yeah, I want to say as much as it sounds terrible to say you've got to revisit your practice or your client base, do what's right from a client perspective. And if at the end of the day, the trust is not viable in a distribution, I would be careful then from a distribution point of view, it will trigger a capital gain.

58:49

S… Speaker 3 (Trust AFS - CPD Consortium)

with the markets where it is and I'm not an investment advisor, maybe this is an opportunity to just have a look at your cost benefits as far as trust is concerned for your client.

59:01

S… Speaker 1 (Trust AFS - CPD Consortium)

So quickly then, you've then got your clear disclosure requirements. Remember now the separation then between interest, dividends, rental, trading, incomes and as such, and then the expenses, which will to be each of those.

59:23

S… Speaker 1 (Trust AFS - CPD Consortium)

I just want to consider what the trust is carrying. So the other one, and this is, and I'm not going to include it in from a debate or a discussion, this, we've had it as a practice to say.

59:36

S… Speaker 1 (Trust AFS - CPD Consortium)

At the end of the day, do we want to then consider, depending on the structuring cost for, and again, folks, I'm saying this is on a case-to-case basis, if you've got substantial structuring cost, do you then want to make the call of changing your portfolio from a passive view?

1:00:00

S… Speaker 1 (Trust AFS - CPD Consortium)

to a trading vehicle. Remember, it changes the, it triggers a potential CGT, but you might then be able to have a broader deduction of expenses. So that's just something to start thinking about for your clients over the coming year.

1:00:24

S… Speaker 1 (Trust AFS - CPD Consortium)

Practical implications, as I've said, your passive investment trusts are going to be the hardest hit. Your trust loan account with a borough money and onward lends to beneficiaries. There's been a few of those where the trust has had, let's say, for instance, the property as such, it secured a loan and bond against the property and onward lends to beneficiaries. And then there's always been that deduction.

1:00:54

S… Speaker 1 (Trust AFS - CPD Consortium)

review going forward mixed income trust where you've got your earning interest rental and business income now you need to have a careful expense allocation and then lastly your cost benefit considering the feasibility of retaining the trust as a vehicle so what are the um anomalies and common traps these are just the notes that i've put down so the big one is signing the financial statement

1:01:18

S… Speaker 1 (Trust AFS - CPD Consortium)

Sometimes it's not practical for all the trustees to sign the financial statements. Then in that instance, and especially because we're in tight deadlines and the aim is to have everything done by the end of October, November, so that we'll meet the deadline. And, you know, there'll always be those five clients that leave everything to the last minute.

1:01:42

S… Speaker 2 (Trust AFS - CPD Consortium)

and you quickly need somebody to sign the financials so that you could submit them with a tax return by due date.

1:01:49

S… Speaker 1 (Trust AFS - CPD Consortium)

Again, it's on a case-by-case basis. In some instances, all of our trustees sign the financial statements. In other instances, it's only signed by the representative of a main trustee. But then wearing my hat on as a trustee, then I want to make sure that all of the trustees sign the resolution, tabling and accepting the financial statements, the approval of those financial statements, and then the tax return and who can submit it.

1:02:16

S… Speaker 1 (Trust AFS - CPD Consortium)

I've given you, here's just an example of a resolution that we put together to say the financials are being prepared and they can be signed by Mr S. The tax returns done, also signed by Mr S. And then the job logs representing XYZ accountants and as the tax practitioners, otherwise to submit the tax return and then deal with any subsequent tax admin matters.

1:02:42

S… Speaker 1 (Trust AFS - CPD Consortium)

That's been done as a resolution that then is included with the financial statements.

1:02:50

S… Speaker 1 (Trust AFS - CPD Consortium)

Then with regards to the attribution of income and capital gains. Now, it's a tricky one because if you're doing the reconciliation of this is the interest that I've received, this is the interest that has been vested and or distributed, but hold on, I've got a shortfall. Why? Because remember, the attribution rules apply first before your

1:03:20

S… Speaker 1 (Trust AFS - CPD Consortium)

vestings and your distribution. So you might have a founder funding income, I mean, founder funding loan that as a consequence of it being a donation settlement or other disposition, and it's an interest-free one in this instance, there might be an attribution of income back to the founder for his founding loan, and then whatever's left over is then either

1:03:47

S… Speaker 1 (Trust AFS - CPD Consortium)

vested or distributed to the beneficiaries if you were having, if somebody was going to reconcile the income received to what was vested and or distributed without knowing about the attribution, it's not going to reconcile.

1:04:06

S… Speaker 1 (Trust AFS - CPD Consortium)

Attribution doesn't go anywhere in the financial statements. It's on your calculation of taxable, the vest-in, the distribution, the attribution of taxable income calculation.

1:04:22

S… Speaker 1 (Trust AFS - CPD Consortium)

So maybe from a completeness point of view, put it in as a no to the financial statements or within the trustee report. I will say we don't do that. Ours is dealt with in a trustee's resolution. Again...

1:04:40

S… Speaker 1 (Trust AFS - CPD Consortium)

I want to say why, in that if you were going to put everything else in and trying to give as much information, why not within the trustees report? The view is, and that's the practice view that they've taken or we've taken, is that it's a deeming...

1:05:00

S… Speaker 1 (Trust AFS - CPD Consortium)

as such, and therefore not part of the financial statements, but it's reportable from a trustee's perspective because the beneficiary needs to know that he or she has got income that he's got to pay tax on.

1:05:16

S… Speaker 1 (Trust AFS - CPD Consortium)

Then with the loan account, loan accounts are not trust capital unless they are waived, converted into capital. Otherwise, they remain liabilities of the trust. So, again, just have a look at where you disclose in it. As I said, deferred tax.

1:05:37

S… Speaker 1 (Trust AFS - CPD Consortium)

I don't think in any of those, even where I know that I've got, like with the instance, this trust now that we've got where all of our beneficiaries are offshore, I'm certainly not going to take deferred tax into account because...

1:05:54

S… Speaker 1 (Trust AFS - CPD Consortium)

Yeah, our policy is not to recognise and do deferred tax because then remember also don't just do it because it's part of your IFRS requirements as such. You could have a number of taxpayers within and actually your trust is not a taxpayer. And also then to bring in the cost for your beneficiaries, that's all dependent on what you're...

1:06:21

S… Speaker 1 (Trust AFS - CPD Consortium)

uh beneficiary's tax rate is so to actually accrue for it and say if i was going to wind up my trust what is it going to cost that's not a financial annual financial station report that i want to say is the a management trustee accountant um uh report or um review then other considerations have a look at the going concern assessment especially where you've got

1:06:51

S… Speaker 1 (Trust AFS - CPD Consortium)

founder funding. So in other words, somebody sets up the trust, puts in 20 million, that money goes into the market, wall breaks out, and then that within a short period of time, that investment's now 15 million. You've got a liability of 20 million that if at the end of the day, your founder died, that's a real and a true liability then to your beneficiaries, I mean, by your trustees to that beneficiary or the funder.

1:07:20

S… Speaker 1 (Trust AFS - CPD Consortium)

So, always as a trustee, keep an eye on the value of your loans to assets and administration.

1:07:31

S… Speaker 1 (Trust AFS - CPD Consortium)

Have a look at then whether it's a subordination of founder or funder loath. That might be more where you've got third parties that are attached to your trust and your requirements are then from a lender perspective. And then also the other one is inadequate disclosure of related parties. Now related parties, remember you can have somebody now who can wear the hat on as the founder, a beneficiary, a trustee and a funder. So to that extent.

1:08:00

S… Speaker 2 (Trust AFS - CPD Consortium)

put it in as to, and we do, we would then put in their founder, trustee and beneficiary.

1:08:10

S… Speaker 1 (Trust AFS - CPD Consortium)

I've left this slide in from a previous webinar that we did just to give you the dates and the deadlines. I did check just before we went in. I still don't think that it hasn't been terrible yet. We don't have the public notice, but it will be fairly tight towards the end of Jan again. And then just a year-end checklist.

1:08:37

S… Speaker 1 (Trust AFS - CPD Consortium)

Make sure that the trustees meet, approve the accounting policies and the distributions. Your minutes are up to date. I know there's been a flurry of communications now at the moment in that from the 1st of May, there's going to be late payment penalties and there's a flurry of returns being caught up and submitted. Have a look at your beneficial owner register. And again, we slipped up the other day. We had...

1:09:05

S… Speaker 1 (Trust AFS - CPD Consortium)

So we did the UBO two years ago. We've had subsequent changes to trustees. You need to then update that UBO register and do the Excel sheet and log it on to the master's portal. Reconciling of trust and bank account statements. Check that your documentation, minutes.

1:09:28

S… Speaker 1 (Trust AFS - CPD Consortium)

SARS queries is up to date then on that side. From a SARS perspective, all trusts have to be registered. Even if they're dormant non-trading, they have to be registered at SARS. Prepare or update your financials, do your rollover, plan your...

1:09:46

S… Speaker 1 (Trust AFS - CPD Consortium)

This was, in fact, a thing done. We did this year in checklist before the end of February. So this was more planning your distributions, timing and documentation. Do your provisional tax calculation. And then.

1:10:00

S… Speaker 1 (Trust AFS - CPD Consortium)

Obviously, we've got the IT3 data coming. So, folks, the bottom line, keep it simple. Make it bespoke. Provide as much. And my view always has been, and I want to say this is how I was taught, was provide as much information as required to staff to not have them ask the next question, but not providing...

1:10:25

S… Speaker 1 (Trust AFS - CPD Consortium)

too much that they will then continue to question. And what that line is, that again is on a case-by-case basis and experience.

1:10:38

S… Speaker 1 (Trust AFS - CPD Consortium)

So don't overdo it, but provide as much as what your trustees need from their responsibilities, especially if you've got, I'm going to say, inactive trustees. And that is an oxymoron in itself in that there's no such thing as an inactive trustee, but it's a trustee that's not necessary.

1:10:58

S… Speaker 1 (Trust AFS - CPD Consortium)

attending and part of the day-to-day transactions as such and only meet annually with the approval of the financial statements and then maybe the last quarter's portfolio management review. It's good for those trustees then just to see why they cover themselves. They've got all that information.

1:11:23

S… Speaker 1 (Trust AFS - CPD Consortium)

But don't do it where you pass the thud test and you end up drowning in notes and annexures. And that is, I know we've got about 10 minutes to spare, folks. So I know there are some questions. Catherine, let me. Cheryl, thank you so much. Thank you. That was great. And we've got some really amazing questions here.

1:11:47

S… Speaker 2 (Trust AFS - CPD Consortium)

We do still have our, we do still have 10 minutes, so it'll be wonderful if we can unpack them. Before we do that, just in terms of the content and the session, I'd love to run our usual poll where we just check that this is what everybody was expecting, that we met your needs. We really appreciate the feedback because it makes sure that we are serving our community properly.

1:12:16

S… Speaker 2 (Trust AFS - CPD Consortium)

And then in a minute or so, Cheryl, I don't know if you are able to see the questions to have a quick look at them. Otherwise, I can just read them out. I think they're really amazing questions. I'm going to give it five more seconds. I see a few people still adding. OK, I think we I think we are there.

1:12:38

S… Speaker 2 (Trust AFS - CPD Consortium)

Two more seconds. Awesome. We're going to end the poll now because I really do want to get to these really cool questions. Do you mind if I just go from the top, Cheryl? Is that fine? Sure. Perfect. So Shadeen asked a question that I've actually been chewing on this whole session. You state that the beneficiaries are entitled to receive the financial statements. From whom should they request this?

1:13:08

S… Speaker 2 (Trust AFS - CPD Consortium)

Can it be requested from the accountant? Do we as accountants have authority to release the financial statements? Cheryl, my view is this is squarely a trustee responsibility.

1:13:19

S… Speaker 1 (Trust AFS - CPD Consortium)

Totally. And to that extent, I would then ask the, I mean, I had one now recently asking for the financials. I said, please put it, don't send me a WhatsApp. Do it formally in writing to the trustees. These are the trustees. We need their approval. Agree totally. This belongs, this is the trustees.

1:13:39

S… Speaker 2 (Trust AFS - CPD Consortium)

Cheryl, I just wanted to mention, we talked quite extensively about the Snaman and De Quirka N.O. and others case that was a Supreme Court of Appeal case in 2024. And that case actually turned on a beneficiary requiring financial information. And it reminded that question just brought the importance of that. So I just want to quote from that case. The judge with reference to Doyle versus Board of Executives really?

1:14:08

S… Speaker 2 (Trust AFS - CPD Consortium)

emphasized a trustee owes a duty of good faith akin to that owed by an agent. He or she must keep regular accounts of all of his or her transactions on behalf of the beneficiary, not only for disbursements, but also the receipts and to render such accounts to the beneficiary at all reasonable times without any suppression, concealment. And it continues. But I think that the message from that case was really clear and quite important. And so I just, I felt I wanted to just sneak.

1:14:38

S… Speaker 1 (Trust AFS - CPD Consortium)

that in if you don't mind. Can I quickly come back on that one? Because at the end of the day, there's always, and I'm not a legal person, but there's always a question as to must the beneficiary accept to say, so although they might have discretionary benefits, do they...

1:15:00

S… Speaker 2 (Trust AFS - CPD Consortium)

accept the space of receiving a discretion at some point in time, which automatically then, I understand from a legal point of view, puts them into the ring.

1:15:09

S… Speaker 2 (Trust AFS - CPD Consortium)

And that's happened years ago in connection with a divorce where the husband didn't want to disclose the financial statements and the wife was advised by the attorney to send the trustees a letter to say, I understand that I'm a beneficiary of the trust. I understand this discretion and I only have a space of receiving, but I accept whatever rights I'm entitled to when you exercise your discretion.

1:15:37

S… Speaker 1 (Trust AFS - CPD Consortium)

which meant she was then in the ring as far as being able to receive that information. Sure, that's something I hadn't thought about, but super interesting. Thank you. Then a question, when are payments? And this is something that comes up a lot, Cheryl. When are payments for education to a beneficiary that exceeds the net income distribution disclosed in the financial statements as well as the income tax return?

1:16:03

S… Speaker 1 (Trust AFS - CPD Consortium)

So I suppose where are they taken? So I suppose this is an education payment that is more than the income that's available for distribution. Presumably that's then a capital distribution, Cheryl? I would agree, trust capital. And then in that instance, Catherine, it would then be, so let's say it's our little Johnny again, it was only 20,000 rands worth of interest. You would then distribute 20,000 rands worth of interest and let's say 80 as trust capital.

1:16:33

S… Speaker 1 (Trust AFS - CPD Consortium)

Perfect. My view is that a payment, an education payment made in respect of a trust deed for a beneficiary essentially amounts to a vesting event. I'm not sure if you agree. And once again, I'm also not a lawyer, but that is my understanding.

1:16:50

S… Speaker 1 (Trust AFS - CPD Consortium)

Then a question that I think is the two that are related. Please assist. I'm confused. According to my knowledge, trust shouldn't have a retained income. My understanding is a trust income would essentially be a subcategory of trust capital, Cheryl.

1:17:08

S… Speaker 2 (Trust AFS - CPD Consortium)

Right. So, yeah, it's basically it's so you write on the basis that retained income at the end of the day, income, whatever's held is actually belongs to the beneficiary. But the trustees first need to then exercise their discretion and then determine is to which allocation it is. So it's literally just a I want to say it's a disclosure in the form of.

1:17:35

S… Speaker 2 (Trust AFS - CPD Consortium)

What is the retained income? Again, if you were then going to have a split between income and capital beneficiaries, you keep it separate then as such. So it's not a directive. It's basically income that is, it's your accumulated retained income that's available for distribution when the trustees exercise their discretion.

1:17:57

S… Speaker 1 (Trust AFS - CPD Consortium)

Yeah, available for distribution. And so then type, and I suppose then we can say not retained income in the eye for a sense necessarily. Correct. A good point. In fact, that's actually a good point. Yeah.

1:18:13

S… Speaker 1 (Trust AFS - CPD Consortium)

Awesome. I saw a question a lot of times that trustee defines trust capital to include net income not distributed to beneficiaries in that year. Cheryl, when I thought about that, when I first read it, I read it incorrectly. But for me, whether an amount is a loan or trust capital boils down to a vesting event rather than distribution in my mind. Do you have a comment? Yeah, I do.

1:18:50

S… Speaker 1 (Trust AFS - CPD Consortium)

It's vested. It's actually when... Yeah, I think it's vested. Yeah, yeah. Because if the amount has been vested in the hands of the beneficiary, then its nature would be that of a loan, in my view. And if we... Yeah. But it... So it is... You know what? And that's where we're doing the anomaly. So it is a... But if it's at the discretion of the trustees, so...

1:19:21

S… Speaker 2 (Trust AFS - CPD Consortium)

We end up putting the vested income at the discretion of the trustees goes part of trust capital. Because if we have to wind that down, that's got to be then settled. The other vestings, no, it is. It still then goes. I mean, we end up putting it.

1:19:48

S… Speaker 2 (Trust AFS - CPD Consortium)

Catherine, I want to say I'm trying to think of all the examples. In some instances, it goes within the trust capital and it goes as the vesting. In other instances, it's gone as a loan.

1:20:00

S… Speaker 1 (Trust AFS - CPD Consortium)

So let's say, for instance, coming back to that education one, you make a distribution of trust. You exercise your discretion and you make a vested enough trust capital, but it's unpaid by your end. That's a loan. That's not part of trust capital. So again, I want to say it goes on a case-by-case basis.

1:20:20

S… Speaker 2 (Trust AFS - CPD Consortium)

Perfect. Thank you. We've got three questions left and one minute. Does there have to be an acceptance of a donation by a trust? You do have to accept the donation. Correct. Does this get documented in a trustees meeting or resolution?

1:20:40

S… Speaker 1 (Trust AFS - CPD Consortium)

I do, yes. And we say that we accept, the trustees accept the following donations and then we still do a very simple deed of donation and we do the IT 144 because SARS now asks for all of the above.

1:20:58

S… Speaker 1 (Trust AFS - CPD Consortium)

Yeah. We do do it as that is not necessarily a cash flow payment. I know at one stage sales required to see the movement and there was a hundred in and a hundred out by the end of February of the year. We've done it on a journal entry and I will be honest, touch with there be no questions or queries on that. I don't know what from a practice point of view, what else?

1:21:24

S… Speaker 1 (Trust AFS - CPD Consortium)

how others do it. I must say, we do it as a loan account. We haven't had come back.

1:21:30

S… Speaker 2 (Trust AFS - CPD Consortium)

Perfect. Then does the annual donation of $100,000, which is now going up, thank you to the Minister of Finance, need to be an actual cash payment or can it be a journal entry beneficiary account? For me, the big thing here is the donations tax in the hands of the donor because if they have made other donations, they may well be subject to donations tax on this amount. Yeah, true.

1:22:00

S… Speaker 2 (Trust AFS - CPD Consortium)

So just check it and then make sure you also don't inadvertently use it for 7C and then reduce your loan account. Yeah, yeah. But it doesn't have to actually be cash, Cheryl? No. Perfect. Are there any tax implications for the trust or the beneficiary if a beneficiary has the use of an asset for no consideration? My view is no.

1:22:25

S… Speaker 1 (Trust AFS - CPD Consortium)

Do you agree, Cheryl? I agree. There's no such thing as a fringe benefit. The reason that they started to, they being saw, started to ask the question was apparently, and I want to say years ago, was then part of the group from a tax point of view of the tax team, and it was purely on the basis that they wanted to understand the deduction of expenses.

1:22:54

S… Speaker 1 (Trust AFS - CPD Consortium)

people were then charging beneficiaries or trustees were charging beneficiaries rental and then deducting private expenses. I understood that was the reason they were asking that question and it had nothing to do with eventually saying we're going to introduce fringe benefits. It was clearly an information gathering process from SARS. And to the best of my knowledge, I know that that's still there.

1:23:18

S… Speaker 2 (Trust AFS - CPD Consortium)

And the best example is the use of a primary residence contained in a trust, for example. Then the final comment, and I think this is going to round it out nicely. SARS distinguishes between vesting and distribution. Vesting first and distribution, they see as a payment. And the Latin for that, that comes from our trust series is dies kittet and dies venet. That we're not going to go into that now. And I know my Latin is terrible. Cheryl, thank you so much for this session.

1:23:47

S… Speaker 2 (Trust AFS - CPD Consortium)

It had a particular purpose and I'm very grateful for all of your wisdom and the experience that you've brought to our learning community.

1:23:59

S… Speaker 2 (Trust AFS - CPD Consortium)

Thank you very much. I'm looking forward to continuing this conversation. Thank you to everyone who's participated. Amazing questions. Thank you also for your comments, keeping this vibrant. It's so wonderful that we're building this learning community where we learn together. Really looking forward to the next session, and we hope you have an amazing day ahead. Thank you so much, Cheryl. Thank you. Goodbye, everybody, and good luck.

Trust AFS - CPD Consortium

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