The Revised Draft Taxation Laws Amendment Bill, 2016 has been approved by Parliament, and although not promulgated yet, it has progressed to a point where we can reasonably expect it to come into law by the expected date of 1 March 2017.
Section 7C applies to loans to a trust, by a natural person or a company with a connected person relationship, that does not charge interest, or charge interest at a lower rate than the official rate. The difference in interest between the official rate and what was charged will be deemed as a donation and donations tax of 20% will be payable thereon, by the person who granted the loan. Donations tax exemptions (R100 000 p.a.) will be applicable though, which might provide some relief.
Certain exclusions are however provided for, for example special trusts for disabled persons have exclusion criteria etc., but one that will be applicable to most of traditional trusts, is the exemption of loans specifically for the purpose of funding the acquisition of a primary residence of the person (or his spouse) granting the loan.
One of the areas where clients ought to take particular advice is where loan accounts are made up of unpaid distributions. Trustees ought to give consideration to redrafting the financial statements to clearly separate unpaid distributions which, in our opinion, would fall outside of the definition of a "loan".
On the accounting side, correct disclosure of these loans in the financial statements will be very important. Reallocations might be necessary to show the true nature of these balances, for example contractual loans that will be applicable to the Section 7C need to be disclosed separately, and unpaid distributions should be disclosed under “Vested Retained Income”. Loans specific to funding qualifying primary residences should also be disclosed separately.
We therefore urge you to engage with us to assist effective tax planning of your trust.
Please contact us for more information or specific questions related to this topic.
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)