SENSIBLE SOLUTIONS
TRUSTS AND INTEREST-FREE LOANS
N
ational Treasury has taken a tough stance in order to curb the avoidance of estate duty by moving assets into a trust with the introduction of the revised Section 7C of the Income Tax Act, No. 58 of 1962 which was signed into law on the 11 January 2017 and takes effect on 1 March 2017.
Basically, any loan, advance or credit that is provided to a trust by either a natural person or a company at the instance of that person where interest is either not charged or charged at a rate lower than the official rate of interest( currently 8 %), an amount equal to the difference between the official interest rate and the amount that was actually charged will now be treated as a donation made to the trust. The annual donations tax exemption of R100,000 can be utilized, however, no deduction, loss or allowance will be available to a lender as a result of the failure of the trust to repay a loan, advance or credit.
What does this mean for you?
The section applies to both new and existing loans and there are transitional provisions or relief to unwind on loan accounts that are already in place. If you have a trust which was funded by way of an interest free loan or interest is charged at a rate lower than the official rate of interest on this loan( currently 8 %) and the trust still owes you the money on 1 March 2017, you will have a new tax implication separate to the other taxes that you may already be liable for on behalf of your trust.
The amount of interest that you should have been charged will be seen to be a donation to the trust which will attract donations tax at a rate of 20 % on amounts above R100,000. However, even if your loan attracts donations tax of less than R100,000, it does not solve the problem as the full R100,000 will no longer be available to reduce the capital balance of the loan.
Some practical examples:
Example 1: A R1 million loan is granted from the trust to a natural person interest free. The tax implications will be as follows:
R1,000,000 x 8 % = R80,000( this is seen to be the donation to the trust).
There will be no donations tax implications as the donation is less than R100,000. However, only R20,000( R100,000 – R80,000) is available to reduce the loan account tax free.
Example 2: A R1.5 million loan is granted from the trust to a natural person interest free. The tax implications will be as follows:
R1,500,000 x 8 % = R120,000( this is seen to be the donation to the trust) Portion subject to donations tax: R20,000( R120,000 – R100,000) Donations tax at 20 %: R4,000( R20,000 x 20 %)
What are the solutions?
There is no one solution“ fits all” scenario; we recommend that your circumstances should be assessed on their own merits. We are already in the process of developing solutions for our clients based on their unique circumstances. Please contact us if you require any assistance with the above.
References Ehlers T, 2016, Interest-free loans to trust, Citadel Wealth Management 2016 Tax Legislative update presented by Pieter van der Zwan
By Kim Doolan, Tax Consultant- Klinkradt Chartered Accountants.
sensible finance Mar17
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