Page Long DescriptionAs from the 1st of March 2017 a new Section 7C of the Income Tax Act will be effective. Interest free loans or low interest loans to trusts by related parties would be subject to donations tax.
From 1 March 2017 Section 7C will apply to any loan provided directly or indirectly to the trust by certain persons. The persons referred to are any natural person who is a connected person in relation to the trust or a company that is a connected person in relation to that natural person, in other words a company in which that natural person either individually or together with a connected person or persons, holds at least an interest of 20%.
Trustee X (individual) made a loan to his trust amounting to R5,000,000 which was used to purchase various assets. He charges interest at 0%. The official rate is 8%.
Deemed interest (donation) = R5,000,000 x 8% = R400,000
Donation = R400,000
Tax free portion = R100,000
Taxable donation = R300,000
Donations tax = 20% x R300,000 = R60,000
The amounts above will be calculated on an annual basis.
Donations tax at 20% will only apply on annual donations in excess of the primary exemption of R100,000 per annum. This means that loan below R1,250,000 will not give rise to donations tax (8% of R1,250,000).
Loans to the following are excluded from the application of this new provision:
2.Trusts registered as Public Benefit Organisations at SARS
3.Vesting trusts where the rights of beneficiaries are clearly established
4.To the extent that a loan is used by the trust for funding the acquisition of the primary residence of the lender.
5.International loans subject to section 31 of the Income Tax Act
6.Loans in terms of Sharia compliant financing arrangements
7.Loans which are deemed to be dividends Contact us to discuss the implications applicable to your Trust so that we can advise you on the most tax efficient solutions available for your Trust’s financial position and long term strategies.