The revised Draft Taxation Laws Amendment Bill, 2016 (section 7C) has been approved by Parliament and should be promulgated soon to be effective 1 March 2017. The second draft was accepted without any major changes to it. Some additions were made to the Explanatory Memorandum issued by the South African Revenue Services (SARS).
An example of the effect of the legislation:
Interest free loan to trust: R10 million
Donation: R10 million x 8% interest at the SARS official rate= R800 000
Donations tax: (R800 000 – annual exemption R100 000) @ 20% = R140 000.
The two most likely scenarios that may apply to you, in line with this legislation are as follows:
- You have sold an asset to the trust on an interest-free loan basis or interest rate lower than the SARS official rate;
- The trustees of a trust made a distribution to trust beneficiaries and the beneficiaries loaned it back to the trust.
Indirect loans to trusts will be subject to section 7C. An example of this would be when you advance an amount to someone who is not a connected person to you (Y), subject thereto that Y will advance an interest-free loan to the trust and cede the claim for repayment by the trust to you as security for repayment of that loan.
Section 7C should not apply in the instance where trustees credit distributions on loan account to a beneficiary, and the payment of the loan is in the sole discretion of the trustees. The trust deed also has to allow the trustees to do so. There must be no contract of loan between the trustees and the beneficiaries for this transaction agreeing on the terms applicable to the retention of the vested amount in trust. The beneficiaries must have no say in whether or when the amount vested in them should be distributed to them (refer to page 11 of the SARS Explanatory Memorandum).
What this means for you:
If you have made a loan to a South African trust, we recommend that you evaluate your position and the impact of this legislation on you before 28 February 2017 (if any). Your specific circumstances would dictate the best tax efficient advice for you. In some cases the best solution would be for you either to pay interest on the loan, or to repay the loan, or to make loans to a company, or to restructure your trust.
In addition, we recommend a review of your trust deed to make sure that:
- the wording is correct to give trustees an absolute discretion regarding payments to beneficiaries of vested amounts;
- the loan amounts are checked in detail as they may fall into the exemptions provided for in the legislation; and
- the loan agreements are not entered into for beneficiary vested amounts on credit account in trust.
- The disclosure in the financial statements of trusts are of the utmost importance – it should clearly differentiate and disclose loans to the trust, separately from vested amounts retained in trust on credit. These should already be included in the annual financial statements of the trust for the year ending on 28 February 2017.
Please contact your Audit Partner on 011 662 0926 to make an appointment.
Alternatively, you can also contact your portfolio or wealth manager for assistance.
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)