Closing a Trust? Get the Sequence Wrong and Pay the Price
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Your client's family trust has been sitting dormant for years — no income, no activity, nothing happening. Easy to forget about. Except SARS hasn't forgotten about it, and if the trustees don't handle the wind-up correctly, the penalties land on them personally.
The Return Obligation Nobody Told Trustees About
Every trust registered in South Africa must submit an income tax return for every year of assessment, including years where the trust had zero economic activity. No income. No transactions. Still a return.
SARS has issued a fresh reminder on this. Dormant trusts are not exempt. And as covered in our article on SARS's final compliance warning to trusts, the revenue authority has been actively pursuing trusts that haven't submitted, issuing administrative penalties that accumulate quietly in the background while trustees assume nothing is wrong.
The Right Way to Close a Trust
If a trust is no longer serving its purpose, trustees can formally wind it down. The process involves two separate institutions: SARS and the Office of the Master of the High Court. The order in which you approach them matters enormously.
Step 1 — Sort out SARS first. Before anything else, trustees must confirm and fully regularise the trust's tax compliance. That means all outstanding returns filed, all payments settled, and all tax obligations resolved.
Step 2 — Then approach the Master. Only once SARS compliance is confirmed should trustees apply to the Master for formal termination. Once the Master issues written confirmation that the trust has been terminated, trustees can then request SARS to deregister the trust for income tax purposes.
This sequence is not optional. The Chief Master issued a directive in 2017 specifically to clarify the procedure — and it exists for good reason.
The Refund Trap
Here is where many trustees get caught out. In some cases, SARS may actually owe the trust a refund. If trustees skip the compliance step and proceed directly to termination at the Master, the trust legally ceases to exist, and so does the office of trusteeship. At that point, SARS is legally unable to process or pay any refund due to a trust that no longer exists.
That money is effectively gone. The termination cannot be undone.
Personal Liability Is Real
Trustees are classified as representative taxpayers under the Income Tax Act. That means they carry personal responsibility for ensuring the trust's tax affairs are in order. Failure to follow the correct process doesn't just create a compliance problem for the trust, it can create direct personal liability for the trustee.
What to Do This Week
If you have clients with trusts, active or dormant, now is the time to run a quick check:
Are all income tax returns up to date, including years with no activity?
Is there any outstanding SARS correspondence sitting unaddressed?
Are there trusts clients intend to wind up in the near future?
If the answer to any of these flags a gap, address it before the Master is approached. The correct sequence protects the trustees, protects any potential refund, and avoids penalties that compound quietly until someone eventually notices.