This document does not constitute tax advice and must not be relied on for any purpose. It is merely a summary of important changes to the Income Tax & related Acts. Some suggestions for your consideration are included.
An important amendment to the Income Tax Act (Section 7C) pertains to interest free or low interest loans to Trusts.
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.
There are some loans excluded from this:
Loans to PBO
Loan for the purpose of acquiring a primary residence
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?
There are a few exclusions, the most relevant to you is that a loan that relates to the purchase of a private residence is exempt from this.
It is uncertain if loans that originate from distributions to beneficiaries will fall within the ambit of this change.
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.
2. Withholding tax
The planned withholding tax on services did not make it into law.
Interest paid to foreign person/entity is subject to a 15% withholding tax.
SARS is required to keep record of assessments for 7 years. However SARS may recover debt as old as 15 years.