In the 2016 Budget presentation, Treasury indicated that they would be reviewing loans made to Trusts as a means of limiting the use of Trusts in avoiding or reducing Estate Duty. The recently published Draft Taxation Laws Amendment Bill sets out, in the form of a proposed new section 7C to the Income Tax Act, how Treasury intends to bring this about. The provisions of this new section aim to impact low-interest or interest-free loans made to Trusts. Such loans are usually made to acquire and grow the value of assets in a Trust rather than in the lender’s personal Estate where they may be subject to Estate Duty.
The proposed section 7C provides that:
- if a loan to a Trust by natural persons (or by a company that is connected to that person) is made at an interest rate less than the official rate of interest (currently 8%) then the difference between the actual rate of interest on the loan and the official rate of interest will be deemed to be income in the hands of that person;
- the deemed income will not qualify for the interest exemption in the hands of that person;
- no deduction by the Trust of the deemed income will be permitted;
- the extent to which the Trust does not actually repay the interest within a period of 3 years will be deemed to be a donation by that person to the Trust and this deemed donation will attract donations tax;
- that person will not be able to use the R100,000 annual donations tax exemption to reduce the loan.
The provisions are in draft format and have been published for comment with a view to them coming into effect on 1 March 2017 and applying in respect of assessments after that date. Various industry bodies are in the process of preparing comments on the proposal and will seek further clarity on the draft provisions including whether they are intended to apply only to loans made after the effective date or also to loans currently in place and whether the provisions are to apply to both local and offshore Trusts.
We will gladly discuss this proposal with you and will keep you updated of further developments.
The Legacy Team