Low interest/interest-free loans to trusts and companies

December 2017

Low interest/interest-free loans to trusts and companies

Does the proposed amendment to the recently implemented anti-avoidance provision, to prevent estate duty and donations tax avoidance through the use of interest-free or low interest loans to a trust, have a reach beyond its intended purpose?

Our March 2017 Tax Alert set out the tax considerations associated with this anti-avoidance provision, as contained in section 7C of the Income Tax Act No. 58 of 1962 (the Income Tax Act). Specifically that the provision levies a donations tax charge at the rate of 20% on interest foregone in respect of affected loans, with effect from 1 March 2017. The interest foregone is calculated as the difference between the official rate of interest (currently 7.75%) and the interest (if any) charged on the loans.

Following the implementation of section 7C some Trusts restructured their assets and funding structures by pushing down the assets and low interest/interest-free loan funding to a company owned by the Trust. However, the proposed amendment (in terms of the 2017 Taxation Laws Amendment Bill, 2017 TLAB) once again evidences the fact that the South African Revenue Service (SARS) is aware of such restructure transactions by bringing them into the ambit of section 7C.

The 2017 TLAB attempts to achieve this by creating a link between the individual taxpayer, the Trust and a company which now has the obligation in respect of the low interest/interest-free loan funding. In turn, the individual taxpayer may still be liable for donations tax at the rate of 20% on interest foregone in respect of affected loans provided to companies.

The stated intention of the proposed legislation is to account for the transactions implemented by taxpayers to mitigate the donations tax burden arising on the initial implementation of section 7C. However, the wording of the proposed amendment in the 2017 TLAB appears to have a reach far beyond this stated intention. Low interest/interest-free loan funding provided to a company (which has no connected person relationship to a Trust) now falls within the ambit of section 7C, simply because the lender is connected to the Trust, but surely should not do so.

Trusts are, generally, initially set up to protect the individual and family wealth/assets and to secure their longevity. Thus, although it is clear that SARS is looking to minimise the tax efficiencies of estate planning opportunities, it needs to ensure that it does not extend the reach of such legislation to situations beyond such intention. It is cautioned that once the 2017 TLAB is promulgated, this proposed change will be effective 19 July 2017, in respect of affected low interest/interest-free loan funding provided by individual taxpayers to companies.

For any questions in respect of the above, or KPMG Enterprise's Private Client assistance, please contact:

Dermot Gaffney

National Lead: Private Client Associate Director M: +27 82 686 9345

E: dermot.gaffney@kpmg.co.za

Creagh Sudding

Enterprise: Family Business Associate Director M: +27 82 719 1995

E: creagh.sudding@kpmg.co.za

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