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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)