Trusts

A trust, in terms of South African law, is based on an agreement between the founder and the trustees for the benefit of the beneficiaries. For this reason, the trust deed is the governing document and similar to the terms of an agreement. In addition to the trust deed, the Trust Property Control Act imposes requirements and governing of the ownership and control of property and the duties of the trustees. The common-law duties of trustees imply that trustees must maintain meticulous records in respect of trust affairs and should always be in a position to account to the Master or the beneficiaries when called upon to do so!

Trusts are not compelled by statutory law to compile annual financial statements (unlike the requirements of companies and close corporations). It is widely accepted that the preparation of annual financial statements is considered to be a requirement of holding office as a trustee; as the financial statements would be needed to reflect annual income, capital gains, asset and financial values, and for the completion of the trust’s tax returns.

The lack of a statutory law requiring annual financial statements also leaves a void with regards to the appointment of an auditor or accounting officer. It has become commonly accepted as good practice that a qualified accounting officer (as would be required by a close corporation) be appointed. The accounting officer would perform similar duties as those required of a close corporation. The Master may insist on the appointment of an auditor where there is good grounds based on the type and nature of trust.

The Trust Property Control Act provides that a clear record of assets held by the trustees must be kept.

This includes the maintaining of an asset register with the following information:

• the nature of trust assets;
• the location of trust assets; and
• the monetary amount attributed to each asset.

The obligations and accountability of trustees imply that there will be substantial cause for trustees to compile and maintain proper annual financial statements. In fact, even if trust’s assets do not produce income and are not constantly changing, the trustees should still have annual financial statements compiled. This will aid in confirming that trustees are aware of exactly what assets are held in the trust. Annual financial statements also provide valuable information that can be used in the event of any enquiry regarding the administration of the trust, or query regarding the trust assets. There may be no statutory financial statement and accounting disclosure requirements relating to the trust activities; however, the trustees could be obligated to account to beneficiaries or to the Master of the High Court when called upon to do so (Doyle v Board of Executors 1999 and section 16 of the Trust Property Control Act). It is the trustees’ responsibility to cause financial statements to be drawn up; and therefore, any representation made in a trust’s financial statements should be taken to be those of the trustees.

The financial year-end of a trust, by default, for taxation purposes is the last day of February. It would make sense, and save on costs, to align the financial year end of the trust to that of the tax year end.

To ensure that acceptable accounting practice is used, the financial statements of a trust should have certain qualitative characteristics. The financial statements should be reliable and in agreement with the underlying accounting records. The accounting records must be supported by vouchers and documents relating to the transactions. The financial statements should be relevant and meaningful for all users of the statements. Financial statements are useful for analysing changes and activities when comparative amounts are stated. Financial statements need to be presented in such a manner that it is understandable to the user. If the financial statements of a trust can be said to be reliable, relevant, comparable, and understandable, then such statements will be in conformity with the accounting framework and broadly comply with generally accepted accounting practices (similar to those of close corporations).

It is generally held that financial statements of a trust should contain at least the following:

This includes the maintaining of an asset register with the following information:

• a balance sheet and relevant notes;
• an income statement (disclosing income, capital gains, and donations);
• a trust fund statement showing accumulated capital and income reserves (including disclosure of distributions to beneficiaries and reasons for such distributions, also distinguishing between distributions that are made in terms of the exercising of trustees discretion and those resulting from vesting rights);
• a statement of beneficiaries’ accounts;
• a statement of transactions with connected persons;
• a cash-flow statement (optional);
• a trustees’ report; and
• an accounting officer’s or audit report (which ever applicable).