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The Tax Amendments Relating to Deemed Donations as a Result of Interest Free Loans to Trusts

The Tax Amendments Relating to Deemed Donations as a Result of Interest Free Loans to Trusts

February 7, 2017

On 8 July 2016, the draft Taxation Laws Amendment Bill (2016) was published. Treasury released an amended version on 26 September 2016, and it was signed into law on 11 January 2017. It contains amendments to the current tax laws that regulate interest-free or low-interest loans by a taxpayer to a trust. It is aimed to deter people from using this method as a vehicle for tax avoidance.


Currently taxpayers are able to sell an asset to a local or foreign trust, enabling it to acquire assets with few adverse tax implications. By creating a loan account, the lender does not receive interest which is taxable and donation tax of 20{911e10481a1f19c5a50a3a01e1fba3cf7ef90ea5fc0f63354a64d045bdc3cbbe} is avoided.  It has been common practice in the past, for individuals to sell their assets to a trust that they have set up.  This has made it easy for people to divest themselves from their assets by transferring them to a trust. This allows the assets to increase in value outside the estate of the original owner. When that person dies the only asset in the estate is the outstanding loan. The assets therefore do not grow in the estate of the original owner and the Treasury is robbed of potential estate duty. If the Bill is passed, by means of a new section 7C of the Income Tax Act, it will result in interest being deemed payable on these types of loans to trusts. The law specifically applies to loans made to trusts and excludes loans made to individuals or companies.

The main aspects of the amendments are as follows:

  • The changes will apply to any credit, loan or advance made to a trust that is either interest free or the interest charged is lower than the current official rate. The difference between the official interest rate and what was charged will be seen as a donation to the trust.  This shortfall will be taxable for the lender and will also not be able to be used as a tax deduction by the trust.  The R100 000 donations tax exemption is reduced by other donations made throughout the year. Donations tax on amounts above R100 000 at a rate of 20{911e10481a1f19c5a50a3a01e1fba3cf7ef90ea5fc0f63354a64d045bdc3cbbe} will apply.
  • The proposed amendments will only apply to loans made to a trust by an individual who is a beneficiary of the trust or who has family members who are beneficiaries of the trust. It applies to loans made to a trust by a company in which that individual holds more than 20{911e10481a1f19c5a50a3a01e1fba3cf7ef90ea5fc0f63354a64d045bdc3cbbe} of the equity shares or voting rights in the company.
  • The amendment affects direct and indirect loans to trusts i.e. it also includes loans to entities that are owned by trusts.

The proposed changes are not applicable to the following:

  • Loans to trusts specifically created for the benefit of the disabled.
  • Loans to any approved public benefit organization.
  • Loans to foreign offshore trusts (subject to section 31 of the Income Tax Act)
  • Loans to trusts that are subject to Sharia compliant financing arrangements.
  • Where the trust used the loan capital to acquire a property that is the primary residence of the lender or his/her spouse. This residence must be used as their primary residence throughout the year.
  • Loans provided in return for a vested interest in the income and assets of the trust. These will be added to the lenders estate for estate duty purposes.
  • Loans that are subject to section 64E(4) of the Income Tax Act. These are loans that are subject to deemed dividend provisions.

These changes are expected to come into effect on 01 March 2017 and will apply to any new loans to a trust on or after that date, as well as existing loans which meet the requirements of the new provision. The levying of donations tax will however only apply to years of assessment on or after March 2017. Taxpayers who previously made a donation to a trust (e.g. 1995) will only be liable for donations tax from 2017 onwards under the new law if the loan is still outstanding.

Copyright 2017 – Tuffias Sandberg

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