An important amendment to the Income Tax Act pertains to interest free or low interest
loans to Trusts. Section 7C.
If a connected person, or a company at the instance of that person, extends an interest-free
loan to a trust of which he or she or any of his or her children are beneficiaries, the loan would
be deemed to accrue interest at 8% per annum. Thus, if an interest-free loan of R1 million is
extended to the trust by such a person, the lender will be deemed to have donated to the
trust on the last day of the tax year of R80 000 ((R1 million x (8% minus 0%)), because no
interest was in fact charged or paid.
But because the annual donations tax exemption of R100 000 will apply, the lender won’t be
liable for donations tax unless the loan exceeds R1.25 million (while the official rate remains
at 8% per annum), provided the person didn’t make any other donations during the year.
New as well as existing loans are affected. The deemed annual donation is ongoing for as long
as the loan is outstanding and bears no/low interest.
Definition of Connected person in relation to a Trust:
- Any beneficiary of the Trust or any other Trust
- Any relative of the beneficiary
- A Company (or CC) in which any of the above is a member or holds at least 20% of the
shares in the Company
Thus a founder of the Trust, or Trustee, being a relative of a beneficiary, will be considered a
connected person
EXAMPLE:
The calculation is done annually based on the monthly balance of the loan & the donations
tax is payable by 31 March (when the year end of the Trust is 28 February). The first payment
will be 31 March 2018.
Issues to consider:
- If interest is charged, will the Trust get the tax deduction? (i.e. is there taxable trading
income in the Trust to set this off against? - The actual interest paid by the Trust is taxable in the hands of the lender
- When a distribution is made to a beneficiary on a loan account, i.e. no cash is paid out
by the Trust; will this loan fall into the claws of Section 7C? This “loan” will not fall into
the ambit of this section when the distribution & non-payment is at the absolute
discretion of the Trustees. As soon as the beneficiary agrees to not receive the cash
but rather leave it on a loan account, this section will apply. The Trust Deed wording
must be considered.
Exclusions:
There are a few exclusions, the most relevant being
- a loan that relates to the purchase of a private residence is exempt from this
- Public Benefit Trusts
- Special Trusts (for persons with disability)
Other matters:
Loans that originate from unpaid distributions to beneficiaries will fall within the ambit of this
change. However, unpaid distributions that does not result in a loan to the Trust will Not fall
within this section.
The conduit (flow thru) principle, where income in the trust distributed in the same year as
when received, retains its identity in the hands of the beneficiary. (interest, capital gain,
dividend, etc.)
This comes into effect 1 March 2017 and applies to existing & future loans.
IMPACT:
- Persons with loan accounts needs to plan for the donations tax that will be due in
March each year - Trustees will have to ensure the books of the Trust is kept up to date to enable the
calculation to be made in early March.
This document covers some important matters. Contact us for professional advice applicable
to your circumstances.
Disclaimer
This document does not constitute professional advice and must not be relied on for any
purpose. It is merely a summary of important changes to the related Acts.