As from 1 March 2017 S7C of the Taxation Laws Amendment Act will come into effect. There will be some important changes which will come into effect. S7C will apply to any loan, advance or credit 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, ie a company in which that natural person, either individually or together with a connected person or persons, holds an interest of at least 20%.
HOW WILL IT WORK
Until this amendment came into effect, a person or a company could make a loan to a trust, and such a loan could be interest free or bear interest rates which a far below market-related rates.
From 1 March 2017, the lender will be required to charge interest on the loan at a market related interest rate. Failing to charge interest could result in a donation being made to the trust from the lender and thus deemed donations tax could be applicable. The applicable interest rate will be a minimum of the interest rate of the repo rate +1% currently being 7.75% (as at 25 July 2017). SARS has also indicated that this is not a fixed amount as they expect the lender to charge an interest rate that is market related. It is also important to note that the interest charged on the loan account must be paid by the Trust itself.
EXCLUSIONS FROM THE OBLIGATION TO CHARGE INTEREST
Loans to public benefit organisations, ‘special trusts’ as defined by law, and so called vesting trusts.
Where the trust used that loan, advance or credit wholly or partly to fund the acquisition of a residence that is used by that person or their spouse as their primary residence, to the extent to which that loan, advance or credit was used to fund the acquisition.
Where the loan, advance or credit was provided to that trust in terms of an arrangement that would have qualified as a sharia compliant financing arrangement as contemplated in s24JA of the Act.
If the trust is a special trust created solely for the benefit of minors with a disability as defined in Section 1 of the Act.
In the case of companies:
If a loan was made by the company and the company elects not to charge interest, the donation can be deemed to have been made by shareholders pro rata to their shareholding, in certain circumstances.
HOW TO PROCEED
A decision must be made between the Lender and the Trustee of the trust on whether interest must be charged and what interest rate will be charged. If the lender is not charging interest, the taxable value of the donation will be equal to the market related interest that the lender has elected not to charge.
Clients should not panic and make rash decisions to close down their trusts and dispose or distribute trust assets before getting appropriate advice. The problem might not be as serious as it seems.
With proper planning, there will be ways to limit the effect of section 7C.
Donations to the value of R1 290 000:
Interest-free loans up to R1 290 000 will not give rise to donations tax –
Donation: R1 290 000 x 7.75% = R99 975.00
Donation tax payable: R99 975.00
Less annual exemption: R100 000