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FOCUS

Money matters and financial services

Special

Mei 2017

14

Time to take action

M

any trusts are established for bona fide estate plan-

ning purposes. These may include protection of assets

from creditors, protection against spendthrift benefi-

ciaries, flexibility, and continuity or in aid of benevolent

purposes (public benefit organisations) to name a few.

Typically, the estate planner would transfer growth assets to the

trust on a loan account. The trust, often set up as a discretionary

trust, would then invest these assets. By doing this the founder

has pegged his estate value at the value of the outstanding loan. The

said loan is the only asset that will attract estate duty in the event of

the founder’s death.

All future growth is accrued within the trust and because a trust

is not a natural person (but rather a legal person or entity) for

estate duty purposes, no estate duty can be levied on assets held

by a trust. The Estate Duty Act only deals with assets that were

owned by the deceased or which are deemed to be part of the de-

ceased’s estate.

Additionally, by funding the trust through an interest-free loan

agreement, potential donations tax is avoided. Eradicating

these benefits, it would seem, is the main driver behind the new

Section 7C to the Income Tax Act.

The new rule

The Taxation Laws Amendment Bill 2016 introduced a new anti-

avoidance measure in the context of low-interest or interest-free

loans made to trusts. The purpose is to address the avoidance of

donations tax and estate duty through the transfer of assets to trust

on loan account. The new Section 7C of the Income Tax Act will

deem the interest foregone to be a deemed donation and the donor

will be liable for donations tax on the deemed donation.

The intention is to subject the transfer of assets to either dona-

tions tax (life-time transfers) or estate duty (transfers on death), not

both. Section 7C, therefore, addresses this and ensures that the

benefit of an interest-free or low-interest loan to a trust is subjected

to donations tax.

Application

Section 7C will generally apply where a natural person or a connect-

ed person in relation to that natural person foregoes interest on a

loan made by that person to a trust. In terms of the section, interest

will be regarded as having been foregone when, during a year of

assessment, either no interest is incurred by the trust on the loan,

or the interest incurred on the loan is incurred by the trust at a rate

lower than the official rate (currently 8%).

The amount of interest foregone will therefore be calculated as

the difference between the amounts of interest that would have

been incurred had interest been incurred at the official rate and the

amount of interest actually incurred by the trust.

Effect

The amount of any interest foregone as described above will be

treated as a donation made to that trust on the last day of the trust’s

year of assessment. As a donation, that amount will be subject to

donations tax, which is levied at a rate of 20%.

However, the R100 000 annual donation tax exemption will still

be available to be utilised in respect of the deemed donation, to-

gether with any other donations (including casual gifts).

The new section is effective from 1 March 2017 and applies to any

loan made to a trust in the prescribed circumstance, irrespective of

when the loan was advanced (i.e. irrespective of whether the loan

was advanced before, on, or after 1 March 2017).

Exemptions

The purpose of Section 7C is to target a specific type of mischief,

i.e. the transfer of wealth by a natural person to a trust. Trusts

are, however, used for a variety of other purposes where such mis-

chief is not an issue.

Section 7C therefore makes provisions for a number of exemptions

from the application of the deeming provisions:

PBO trusts: Public Benefit Organisations.

Section 30C trusts: These trusts are created to assist with

the funding of small businesses, also known as small business

funding entities.

Vesting trusts: The loan, advance or credit was provided to the

trust by a person for 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 the trust hold in aggregate a vested inter-

est in all the receipts, accruals and assets of the trust.

No beneficiary can in terms of the trust deed hold or acquire

an interest in the trust other than a vested interest as envis-

aged above.

The vested interest of the beneficiary is determined solely

with reference and in proportion to the assets, services or

funding contributed by that beneficiary to the trust.

– new anti-avoidance rules for trusts

HESNA RHEEDER

and

JAN COETSEE,

PricewaterhouseCoopers

Example

Assume a natural person advanced a R10 m interest-free loan

to his/her family trust on 1 March 2017 and that the loan is re-

paid in full 182 days later on 30 August 2017.

The natural person’s Section 7C tax liability will be calculated

as follows:

Deemed donation (as at 28 February 2018)

= R400 000 (R10 m x 8% [official rate of interest] x 182/364

days)

Donations tax

= R60 000 (R400 000 [deemed donation] – R100 000 [donations

tax exemption] x 20% [donations tax rate])

Payable by when

= on or before 31 March 2018 (donation deemed to be made

on the last day of the year of assessment of the trust/dona-

tions tax payable by end of following month)