ARE TRUSTS STILL SAFE TO USE FOR BEE PURPOSES?

BEE has been a feature of the South African business environment for a while. A number of businesses have been battling with the B-BBEE ownership requirement. Without black ownership, it is almost impossible to achieve a Level 4 B-BBEE status or better, which may negatively impact businesses in South Africa. It is true that some businesses do abuse trusts as an allowed vehicle to circumvent the Broad-based Black Economic Empowerment Act (B-BBEE Act). In some of these schemes no real black beneficiaries are identifiable and are often referred to as ‘faceless’ beneficiaries. This is clearly abusing the law. The government will continue to attack such structures with the result that businesses may suffer.


THE LAW ALLOWS AND ENCOURAGES THE USE OF TRUSTS


Shareholding can either be held directly by black people, or through a variety of entities as an indirect form of B-BBEE ownership such as Broad-Based Ownership Schemes (B-BOS) and Employee Share Ownership Programmes (ESOPs) in terms of the existing B-BBEE Codes (paragraph 3.1 of Code Series 001). A B-BOS or ESOP structure can operate as an association of members, a non-profit company, a private company or a trust. A trust is a useful vehicle to use because of its flexibility to cater for broad-based empowerment, such as the youth, disabled employees, communities and the poor, whom the B-BBEE policy and legislation aim to benefit. Such structures are required to benefit a larger base of people, rather than to benefit a single person or small groups of people, which would defeat the objective of Broad-based Black Economic Empowerment. It is important to note that ESOPs, trusts and B-BOS have specific rules that need to be complied with - e.g., that at least 85% of the value of benefits allocated must accrue to black people, 50% of the fiduciaries must be independent, 50% of the fiduciaries must be black people and 25% must be black women.


On 29 of November 2018 the B-BBEE Commission issued a guide entitled “Understanding the use of Trusts in B-BBEE Ownership Initiatives”. Two important issues were raised by the Commission. The one issue was in relation to educational trusts. The B-BBEE commission held that “Beneficiaries cannot be selected each year to receive benefits in the form of dividends from the measured entity, for payment of their education, training or social upliftment projects, which are matters that should be catered for under corporate skills development, social investments or socio-economic development”. The second issue raised was in relation to the treatment of minors. The B-BBEE commission held that the use of “under-age children as beneficiaries will be regarded as circumvention of the B-BBEE Act as they have no capacity to exercise rights flowing from such ownership.” It, by implication, meant that a normal family trust (where children are included as beneficiaries in most instances) created as part of an estate plan could not be part of a B-BBEE structure. That was ludicrous, as generational wealth creation possibilities were destroyed. It was also noted in the guide that each participant must know in advance the portion of their entitlement to receive economic interest, and that during B-BBEE measurement, proof of payment must be produced. This requirement therefore disqualified the use of discretionary trusts.


The guide also stated that there should be active participation from all black participants, irrespective of whether the shares in the measured entity are directly or indirectly held. This notion goes against the trust form, which requires the trustees to act on behalf of the beneficiaries, where beneficiaries do not play an active role in the management of the trust. It is clear that this guide caused a number of trusts, used in empowerment structures, to be questioned. A number of people even went as far as professing that trusts cannot and should not be used in empowerment structures, as they will always be open to attack. Some BEE verification agents started disqualifying trusts for B-BBEE Ownership.


Only on 18 May 2021 did the Minister of Trade, Industry and Competition publish a practice note, in terms of the B-BBEE Act, on the rules for entities such as B-BOS, ESOPs, trade unions, not-for-profit companies, co-operatives and trusts - collectively referred to as discretionary collective enterprises (DCEs) - for purposes of B-BBEE measurement and recognition. This practice note aims to address uncertainties regarding the use of such entities for B-BBEE purposes, especially caused by the guide issued in 2018 as mentioned above. This practice note was a change to the 2018 interpretation by the BEE commission, which was much needed to preserve a trust as an allowed mechanism to meaningfully transfer business ownership into black hands. It was confirmed that DCEs have benefited many black beneficiaries to access the economy and/or to enjoy economic empowerment.


TYPES OF TRUSTS ALLOWED


Although the B-BBEE Codes allow the use of B-BOS and ESOPs, a conventional B-BBEE trust (such as a family trust) would also qualify as an ownership entity even if it does not house a B-BOS or ESOP structure, as long as it complies with the rules of the B-BBEE Codes. DCEs also allow “single purpose Collective Enterprises” such as educational, developmental and community upliftment type of B-BOS or trusts to be recognised in a chain of ownership. The Department of Trade and Industry ruled that DCEs making distributions in terms of skills development, training and education “to members of a defined class of natural persons does not in any way detract from the Economic Interest points claimable by or through these schemes”.


BENEFICIARY DEFINITION


It is important that the trust deed, the trust’s constitutional document, clearly stipulates the racial composition, otherwise the participants must be regarded as non-black. A defined class of black beneficiaries satisfies ownership for purposes of the B-BBEE Codes and beneficiaries need not be individually identified, such as Mr X with identity number…. The Minister stated that meaningful broad-based ownership by black people, communities and workers is often best served by identifying a natural class of persons to benefit from the scheme (typically done in a discretionary trust) as opposed to a list of individuals with vested rights.


The B-BBEE Codes place no restrictions on the nature of beneficiaries. Minors (under the age of 18) are therefore not prohibited from being beneficiaries. This is so because their ownership rights are exercised by the trustees (they are voting on behalf of all beneficiaries). The minors’ lack of legal capacity is therefore not relevant. The DTI has ruled that “without derogating from the generality of this statement, minors for example, are not restricted from being participants or beneficiaries in any way, whether as part of a defined class of natural persons or individually.”


Beneficiaries defined in a trust deed as “workers of the firm” may also satisfy the ownership provisions of the B-BBEE Codes. Annexure 100(C) of the B-BBEE Codes permit a trust which identifies the beneficiaries as employees of the company for as long as they remain in its employ. This enables the utilisation of a trust as an incentive for employees to remain with the business over the long term.


Although Annexure 100(C) requires that all accumulated economic interest of the scheme be payable to the beneficiaries at the earlier of a specified date or event, or the termination of the scheme, it does not require such an earlier date or event to be specified in the trust deed. The only requirement is that the accumulated economic interest of the trust ultimately goes to its beneficiaries and not to anybody else. It will therefore be sufficient if the trust deed stipulates that its accumulated economic interest must be distributed to one or more of the remaining qualifying beneficiaries on termination of the trust.


DISCRETION


Trustees are allowed to be given discretion to vest benefits in beneficiaries from time to time and may even have a discretion in relation to the portion of the beneficiaries’ entitlement. It is therefore allowed for a trust deed to provide for the discretion of the trustees to distribute, in their sole and unfettered discretion, such portions of the trust’s income and capital as they deem fit from time to time, to some members of a defined class of natural persons to the exclusion of others. Due to discretion afforded to trustees, the trust may not be penalised for not having made any distributions in any particular year, as earnings retained and not distributed ultimately vest in the individual or defined class of natural persons.

Following the trustees’ exercise of their discretion, each beneficiary selected to benefit from a particular distribution acquires a vested right to such portion of the particular distribution allocated to them. The discretion afforded to trustees allow them to exclude a beneficiary, who have already benefitted, from future distributions and such beneficiary will not be automatically entitled to future distributions. This does, however, not mean that the trustees can benefit anyone outside of the defined class of beneficiaries in the trust deed.

If the trust deed expressly provides for a fixed percentage of distributions to vest in the “defined class of natural person”, it satisfies the rule of identifying the proportion of entitlement of beneficiaries by means of a “written record of fixed percentages of claim”, provided that the trust deed does not give the trustees the discretion to distribute less than that fixed percentage to beneficiaries who are members of the defined class of natural persons. The practice note also states that where a trust deed provides for a formula to determine the proportion of a claim of a “defined class of persons” or the entitlement of individuals selected out of that defined class and the trustees are not awarded a discretion to deviate from the formula, the scheme also complies with the rule that the trustees “may have no discretion” on the terms.


REPORTING


The practice note also states that the requirement under the B-BBEE Codes that a trust’s financial reports be presented to beneficiaries at an annual trustee meeting implies that beneficiaries must be invited to the annual trustee meeting but does not require all beneficiaries to be present at the meeting in order for the trust to comply.


MORE CHALLENGES


The Minister noted that there is still a challenge to promote participation of individual entrepreneurs in order to improve the level and quality of representation of black South Africans in the economy to minimise exploitation of the B-BBEE provisions and to ensure that broad-black ownership strengthens transformation of the economy. Further guidance should be provided on this. But at least a trust is still a recognised form to be used in B-BBEE structures.


Phia van der Spuy is a Chartered Accountant with a Masters degree in tax and a registered Fiduciary Practitioner of South Africa®, a Chartered Tax Adviser, a Trust and Estate Practitioner (TEP) and the founder of Trusteeze®, the provider of a digital trust solution.

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