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Capital Gains Tax Risks for Trusts: The Dangers of Relying on IT3(c) Disclosures
- 10 June 2025
- Trusts
- The Tax Faculty Tax Specialist
This article is based on tax law for the year ending 29 February 2026.
Question:
In 2014, a trust acquired shares at a cost of R6 per share. By 2018, the company was listed with a valuation of R14 per share. The shares have now been sold for R15 per share. However, the IT3(c) form issued by the financial institution reflects a base cost of R14 per share, thereby indicating a gain of only R1 per share. In reality, the capital gain realised is R9 per share. The trustees — one of whom is a qualified accountant active in the financial services sector — have directed that the IT3(c) disclosure be used as the base cost for purposes of calculating and declaring the capital gain, and for the distribution to beneficiaries for the 2026 tax year.
Answer:
The Problem / Facts
In 2014, a trust acquired shares at a cost of R6 per share. By 2018, the company was listed with a valuation of R14 per share. The shares have now been sold for R15 per share. However, the IT3(c) form issued by the financial institution reflects a base cost of R14 per share, thereby indicating a gain of only R1 per share. In reality, the capital gain realised is R9 per share. The trustees — one of whom is a qualified accountant active in the financial services sector — have directed that the IT3(c) disclosure be used as the base cost for purposes of calculating and declaring the capital gain, and for the distribution to beneficiaries for the 2026 tax year.
Analysis of Tax Issues
The core issue is the misstatement of the base cost for capital gains tax purposes. The correct base cost is R6 per share (the actual acquisition cost in 2014), and not R14 per share as reflected in the IT3(c). The listing in 2018, despite the R14 valuation, does not constitute a disposal or trigger a revaluation for capital gains tax purposes. As a result, there is a material understatement of the capital gain: R1 per share has been declared, instead of the actual R9 per share. The trustees’ decision to rely on the incorrect IT3(c), despite possessing professional expertise, raises concerns regarding a potential wilful under-declaration and exposure to tax penalties.
Tax Issues with Reference to Relevant Legislation
Incorrect Base Cost Determination:
- Section 1 of the Income Tax Act: Definition of "base cost"
- Paragraph 20 of the Eighth Schedule: Rules for determining base cost
Understatement of Capital Gains:
-
Paragraph 3 of the Eighth Schedule: Inclusion of capital gains in taxable income
Trustee Duties and Potential Penalties:
- Section 223 of the Tax Administration Act: Understatement penalties
- Section 154 of the Income Tax Act: Duties of representative taxpayers
Application of the Law to the Facts
Base Cost Determination:
The correct base cost is R6 per share, based on the actual acquisition in 2014. The 2018 listing at R14 per share does not constitute a disposal or a revaluation event and therefore does not alter the base cost. The IT3(c) form’s disclosure of R14 per share as base cost is factually incorrect and cannot override the true acquisition cost.
Capital Gains Calculation:
The actual capital gain is R9 per share (selling price of R15 less acquisition cost of R6). This reflects a significant understatement — 900% — compared to the R1 gain reflected on the IT3(c) form.
Understatement Penalties:
Given the material understatement (a discrepancy of R8 per share), and the fact that a trustee with accounting qualifications is involved, the South African Revenue Service (SARS) may levy penalties under Section 223 of the Tax Administration Act. The penalty percentage depends on whether the conduct involved reasonable care, negligence, or intentional tax evasion, and can range from 25% to 200%.
Trustee Liability:
Trustees, especially those with professional qualifications, have a fiduciary and legal obligation to ensure tax compliance. Reliance on an incorrect IT3(c) form — where the correct acquisition cost is clearly known or should be known — may constitute a breach of duty under Section 154 of the Income Tax Act as a representative taxpayer.