George M. Mangion
It is interesting to note that the Trust and Trustees Act (TTA) makes various references to the statutory duties of trustees in connection with obligations to render a correct account of their acts and dealings to beneficiaries. Although no specific guidance is rendered in the Act as to the actual format of the accounts to be prepared, the TTA makes various enabling provisions to allow for such guidance to be issued by the MFSA.
It also may prescribe what type of accounts trustees are obliged to prepare and takes the concept prevalent in International Accounting Standards that accounts have to give a true and fair view of the assets administered under the trust deed. But compliance with IFRS may not necessarily meet all the obligations of the trust deed under the Act since a trust does not generally fall under the definition of a commercial, industrial entity or have a profit motive as its main aim. Certainly provisions may be issued so as to regulate matters relating to the requirements of review or audit including directions relating to the duties of auditors and their qualifications.
Again the trustee may apply to the Second Hall of the Civil Court for directives concerning the manner in which he may act in terms of his stewardship duties and the manner in which transactions may be correctly reported in his acts and records.
The Court under section 37(2) may inter alia make an order concerning the submission of accounts although it is hoped that specific form of account keeping will be also regulated by International accounting standards particularly where the trustees elect to opt for the taxation of the trust as a corporate body. The Income Tax Act as amended thus allow trusts to be treated as companies for tax purposes so again here in this instance it would appear that the trustee shall need to keep all records and submit all returns as one would expect in case of companies compliance rules. Certainly when opting under section 27D (1 ) of the Income Tax Act to be taxed as a company one expects the rules and regulations of accounting for companies such as audit and the compliance rules of the Company Act 1995 to apply. Definitely accurate records have to be maintained in order to ascertain the chargeable income in relation to the income attributable to a trust.
The amendment to the Income Tax Management Act and in particular section 24A (1) states that the Commissioner of Inland Revenue may give notice to a trustee requiring him to furnish within 30 days a return containing a true and correct statement certified by an auditor of the income attributable to such a trust. The return has to explain the details pertaining to the names, addresses of beneficiaries together with respective income so allocated to them.
Again allocations of distributable profits have to be accurately recorded to show the distributions to beneficiaries. Following the election for the income of the trust to be treated as a company, all the records and returns have to meet the requirements of the Companies Act 1995 and all submissions need to be certified by a auditor. In practice the generally accepted accounting practices (GAAP) advocate that the trust accounts match the high standard expected from a person who acts with prudence diligence towards the stewardship of trust assets held and administered on behalf of beneficiaries.
Can we be guided by other trust jurisdictions as to the type and content of trust accounts rendered by trustees? The answer is that it is reasonable to assume that tried and tested rules established by other trust jurisdictions has served the industry well and soon the MFSA is expected to issue guidelines to better regulate the production of such records. The trustee will be expected to comply with the four fundamental concepts of accounting insofar as possible, namely, going concern, accruals, prudence and consistency. The accounting system has to mirror faithfully the nature of the trust and follow the governing law of the trust deed while considering the tax situation of beneficiaries.
This is to consist of a trust receipts journal, a trust disbursements journal, and a trust ledger book containing the individual ledger accounts for recording each financial transaction affecting that client's funds.
Here one can assume that trustees whether being an individual or a corporate trustee may delegate the preparation and auditing of trusts records to professionals. In fact section 25 permits the trustee to employ accountants, custodians and other professional agents.
It is therefore to be expected that such professionals must in their competence hold proper and accurate accounts of the trust. One would contemplate that each client's ledger account should reflect the date, source, and a description of each item of deposit, as well as the date, payee, and purpose of each withdrawal. Luckily there exist a number of propriety software packages in the market which efficiently speeds up the task of daily accounting records.
Subject to the contrary and without specific guidance from the trust instrument, or legislation, the trust accountant would normally ensure that the trust records contain such information as will provide sufficient details to enable the preparation of periodic statements of account and any necessary tax returns and ancillary reports.
The form that the periodic statements normally take comprise of a balance sheet, a capital account and an income account. Briefly one may explain that the capital account will include the trust capital and any accretions or diminutions over the year. Any distributions will be recorded as deductions from this account. Conversely the income account is a true perspective of the stewardship by the trustee showing the sources of income by investment category and the divisions of income between life tenants.
A trustee will be expected to comply with the four fundamental concepts of accounting insofar as possible, namely, going concern, accruals, prudence and consistency. In trust accounting it is essential that a clear distinction be made between capital and income. Such detailed records are essential as trustees may be required to provide an account of the trust assets and liabilities to the beneficiaries or to the Court so as to demonstrate that they have complied with the terms of the trust instrument as well as any applicable laws.
It is usual to provide an investment schedule detailing the opening and closing nominal and book amounts, and showing any movements during the period including acquisitions, disposals, capital gains and losses, rights and bonus issues, exchanges and any revaluations. From an accounting point of view it would certainly appear inconsistent not to amortize either discounts or premiums.
It is usually considered inappropriate to provide depreciation for such an item unless specifically addressed in the trust instrument.
In most cases the trust instrument obliges the trustee to maintain adequate accounting records. In no instance however, is the exact nature of these records described in TTA. It is no consolation that in the case of reporting the financial position of a company, accountants are guided explicitly as to the form and content of the financial statements. However, such standards are expected to be issued shortly by MFSA together with guidelines on the operation of a code of conduct for trustees. Section 57 talks about the powers to make regulations by the Minister who on the advice of the MFSA may make regulations to establish the requirements relating to the books of account to be maintained by trustees.
The author is a partner in PKFMALTA an audit and business advisory firm