Section 7C of the Income Tax Act came into effect on 1 March 2017. This section specifically deals with Interest Free- or Low Interest Loans to Trusts. The aim of Section 7C is to prevent the Estate Duty avoidance that could result when a person transfers a growth asset to Trust, in return for a fixed loan that does not grow in value, because no interest is charged on the loan.
With effect from 19 July 2017 the provision of Section 7C is extended to a loan made by an individual to a company in which such a Trust holds at least 20% of the equity shares or is able to exercise 20% of the voting rights.
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 (or a company with effect from 19 July 2017),
- in relation to which that person or company (or any person that is 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 (or company) in respect of the loan, advance or credit, or
- interest is incurred at a lower rate than the official rate of interest (from 1 March 2017 – 31 July 2017 the official interest rate was 8%, from 1 August 2017 the official interest rate decreased to 7,75%)
Exemptions applicable to Section 7C include:
- The provisions of Section 7C do not apply if:
a) That trust (or company) 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
i. The beneficiaries of that trust hold, in aggregate, a vested interest in all the receipts, accruals and assets of the trust;
ii. 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;
ii. 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
iv. 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 (or company) used the loan, advance or credit wholly or partly for purposes of funding the acquisition of an asset; and
i. 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
ii. 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 7,75%.
Value of Loan Account: R 10 000 000 Deemed Interest / Donation: R 775 000 (R 10 000 000 x (7,75% – 0%))
Donations Tax: Taxable Donation R 775 000 Donations Tax @ 20% R 155 000 (on an annual basis)
Please note that donations tax is payable no later than the 29th of March 2018 and we are currently hard at work to calculate you loan account movement for the 2018 financial year. Please contact your trusted accountant or tax practitioner should you have any queries relating to the new Section 7C legislation.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
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