President Jacob Zuma has signed The Taxations Laws Amendment Bill (TLAB) into law on 11 January 2017. The TLAB will be implemented effectively from 1 March 2017. A new section, Section 7C, has also been introduced. This section specifically deals with Interest Free or Low Interest Loans to Trusts.
SUMMARY OF SECTION 7C:
The section applies to any loan, advance or credit that is made by a natural person, or at the instance of that person by any company in relation to which that person is a connected person (i. any person who individually or jointly with any connected person in relation to himself holds directly or indirectly at least 20% of the company’s equity share capital or voting rights),
to a trust, in relation to which that person or company (or any person that’s a connected person (i. a beneficiary of a trust, any relative of such beneficiary, any other beneficiary of such a trust)) in relation to that person or company is a connected person
no interest is incurred by the trust in respect of the loan, advance or credit, or interest is incurred at a lower rate than the official rate of interest (currently at 8%).
EXEMPTIONS APPLICABLE TO SECTION 7C
The provisions of Section 7C do not apply if:
a) That trust is a Public Benefit Organisation approved by the Commissioner in terms of Section 30(3) of the Act, or
b) That loan, advance or credit was provided to the trust by a person by reason of, or in return, for a vested interest held by that person in receipts and accruals and assets of that trust; and
The beneficiaries of that trust hold, in aggregate, a vested interest in all the receipts, accruals and assets of the trust;
No beneficiary can, in terms of the trust deed governing that Trust, hold or acquire an interest in that trust other than a vested interest in the receipts and accruals and assets of that Trust;
The vested interest of each beneficiary of that Trust is determined solely with reference and in proportion to the assets, services or funding contributed by that beneficiary to the trust; and
None of the vested interests held by the beneficiaries of that Trust is subject to a discretionary power conferred on any person in terms of which that interest can be varied or revoked, or
c) The trust is a Special Trust as defined in paragraph (a) of the definition of a special trust, or
d) The trust used the loan, advance or credit wholly or partly for purposes of funding the acquisition of an asset; and
that asset was used throughout the year of assessment by the person granting the loan or the spouse of that person, as a primary residence; and
The amount owed relates to the part of the loan, advance or credit that funded the acquisition of that asset; or
e) That loan, advance or credit constitutes an affected transaction as defined in Section 31(1) that is subject to the provisions of that section, or
f) That loan, advance or credit was provided to that trust in terms of a Sharia compliant financing arrangement, or
g) That loan, advance or credit is subject to the provisions of Section 64E(4) (Deemed Dividend Provisions)
PRACTICAL EXAMPLE OF SECTION 7C
Trustee A made a loan to his trust amounting to R 10 000 000 which was utilised by the trust to purchase various assets. He charges interest at 0%. The official rate, as defined, is 8%.
Value of Loan Account:
R 10 000 000
Deemed Interest / Donation:
R 800 000 (R 10 000 000 x (8%-0%))
R 800 000
Donations Tax @ 20%
R 160 000 (on an annual basis)
From the example above it can be determined that if proactive actions are not implemented by such persons affected by the new Section 7C, severe tax liabilities will be the consequence.