The revised Draft Taxations Laws Amendment Bill, 2016, was approved by Parliament and assented to by the President on 11 January 2017.
As far as trusts are concerned, the new Section 7C provisions can be summarised as follows:
- The provisions apply to a loan, advance or credit made by a natural person,
or
- at the instance of that person, by any company in relation to which that person is a connected person (i.e. any person who individually or jointly with any connected person in relation to himself directly or indirectly holds at least 20% of the company’s equity share capital or voting rights),
- to a trust,
- in relation to which that person or company (or any person that’s a connected person, e. a beneficiary of a trust, any relative of such beneficiary, any other beneficiary of such a trust) is a connected person, and
- no interest is incurred by the trust in respect of the loan, advance or credit,
or
- interest is incurred, but at a lower rate than the official rate of interest (contemplated in paragraph 1 of the Seventh Schedule to the Income Tax Act – currently 8%).
Results to which the above-mentioned provisions apply:
- Donation: An amount equal to the difference between the amount incurred by the trust in respect of the year of assessment and the amount that would have been incurred by the trust at the official rate of interest mentioned above, will be treated as a donation made to the trust, on the last day of the year of assessment, by the person who made the loan to the trust.Example: Mr X made a loan to his trust to an amount of R12 000 000, which was utilised by the trust to buy shares. He charges interest at 5%. The officially-defined rate is 8%.The donation amount will be: R10 000 000 x (8%-5%) = R 360 000.
The donations tax is calculated as follows:
Donation of R360 000, less the annual exemption of R100 000 = R260 000.
Donations tax @ 20% = R52 000.The section will come into effect on 1 March 2017 and will apply to any amount owed by a trust in respect of a loan, advance or credit provided to the trust before, on or after this date.
SUMMARY
- The introduction of this proposal is a direct result of the intention of National Treasury to curb the use of trusts as a means to save on estate duties;
- The net result will be that the difference between the interest charged on a loan to a trust, as envisaged, and the official rate (currently 8%) will be taxed as a donation in the hands of the person granting the loan;
- The typical scenarios relevant to trusts which will be effected by this proposed legislative change (when promulgated) are:a.Where a person sells an asset to a trust on an interest-free loan or charge interest on the loan at a rate lower than the official rate prescribed by SARS (currently 8%);
and/or
b.Where the trustees of a trust make a distribution to trust beneficiaries and the beneficiaries loan the money back to the trust.
The provisions should not apply to cases where the trust deed provides that trustees can, in their discretion, decide to credit distributions on a loan account on behalf of a beneficiary, the payment of which will be in the sole discretion of the trustees. In these cases the ensuing loan account does not constitute a loan as envisaged by the Act as there is no loan contract between the beneficiary and the trustee.
Page 11 of the Declaratory Memorandum clearly states that any distribution to a beneficiary, which is vested irrevocably in the beneficiary by the trustees and is used or administered for the benefit of the beneficiary, without distributing or paying the amount to the beneficiary, will not qualify as a loan or credit provided by that beneficiary to the trust, provided that either the trust deed contains provisions preventing the trustees from distributing that amount to the beneficiary (e.g. where a beneficiary only becomes entitled to a distribution at a certain age) or the trustees have sole discretion in terms of the trust deed to decide on the timing and extent of any distribution of such vested amount to the beneficiary.
It is also clearly stated that, should the beneficiary have any say in if or when the amount so vested should be distributed, or s/he enters into an agreement with the trustees in terms of which the amount may be retained in the trust, this amount will be treated as a loan or credit to the trust by that beneficiary, as envisaged in Section 7C.
- The annual donations tax exemption of R100 000 will apply to the donation envisaged in this section.
- The Declaratory Memorandum also contains an example that explains what would be seen as an indirect loan to a trust, which will still be subject to the provisions of Section 7C. This example refers to a planner advancing a loan to a business associate that is not a connected person in relation to the trust, subject to the arrangement that the business associate will in turn advance an interest-free loan to the trust and cede the claim for repayment by the trust to the planner as security for repayment of the amount. Such a loan would be seen as an indirect loan by the planner to the trust.
- While these new provisions will affect estate planning via trusts, it will most definitely not mean the end of the trust as we know it. Careful planning should still make it possible to utilise the trust as a more than useful estate planning vehicle.
- If the trust earns taxable income, it might be worthwhile – again depending on surrounding factors – to pay interest on the loan account, since a trust would be able to deduct the interest for tax purposes.
Contact Fanus Jonck (tax@jonck.net) for tax and trust advice.
