The fundamental legal concept of a South African trust, whether it is a vested or discretionary trust, is that there is a separation between beneficial ownership of the Trust’s assets, which may now or in the future reside with some or all of the beneficiaries, and legal or registered ownership of the Trust’s assets, which resides with the Trustees.Various legal consequences flow from this concept, such as invalidating a trust where the trustees and the beneficiaries are the same people.

The General Laws Amendment Act 2022 (GLAA) was gazetted on 29 December 2022 and most of its sections will come into effect on 1 April 2023.The GLAA is an attempt by the South African government to stay off the grey list of the Financial Action Task Force (FATF), the global money laundering watchdog.The GLAA is primarily aimed at beefing up South Africa’s FICA legislation.FICA requires, among other things, requires that accountable institutions like banks, attorneys, estate agents and long-term insurers verify the identities and beneficial ownership of their clients.

As there is often some difficulty in establishing who the “beneficial owners” of a trust are, the legislators have tried to circumvent this problem by deeming certain people to be the beneficial owners of a trust in the Trust Property Control Act (TPCA). They have selected ALL of the following people as the “beneficial owners” of a trust:

• any natural person who directly or indirectly “owns” the trust property;
• any natural person who exercises effective control of the administration of the trust arrangements;
• every founder (or if the founder is a juristic person, then the natural person who directly or indirectly owns or exercises effective control of that juristic person);
• every trustee (or if the trustee is a juristic person, then the natural person who directly or indirectly owns or exercises effective control of that juristic person); and
• each beneficiary referred to by name in the Trust Deed (or if the beneficiary is a juristic person, then the natural person who directly or indirectly owns or exercises effective control of that juristic person).

The only place where the words “beneficial owner” are introduced in the TPCA is at the new section 11A where trustees are now required to establish and record the names and other prescribed information of the “beneficial owners” of the trust and to lodge this record with the Master.Trustees must now also record the details of all accountable institutions (banks, attorneys, estate agents, etc.) who they use as agents to perform the trustee’s functions or to provide services.Failure to perform any of these duties or any other duties can result in a fine of R10 million or imprisonment of 5 years for the trustees.

The amendments do not introduce any definitions of the words “own” or “effectively control” into the TPCA.This leaves the interpretation of these words and therefore the meaning of these sections in the hands of the courts.

The GLAA further amends the TPCA by reinforcing the requirements for the trustees to notify the banks that the funds which they hold in separate bank accounts for the trust are held in their capacity as trustees. This of course has always been the case, however this requirement now seems to contradict the newly introduced deeming provision which at first glance appears to make the trustees the beneficial owners of all the trust’s assets.

The TPCA has also always contained the duty of care trustees must act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another.This remains the position.

In my view, the newly introduced section 11A is simply a mechanism for banks and other accountable institutions to achieve their FICA compliance with greater ease.It does not make the trustees or the founder or any of the other persons listed in the definition of “beneficial owner” the actual beneficial owners of the trust. To do so would turn South African trust jurisprudence on its head, which is surely not the consequence that the GLAA had in mind.

Nevertheless, there are now more administrative burdens for trustees of trusts to comply with and with which they should familiarise themselves.  Please contact Shepstone & Wylie for more details.