The Draft Taxation Laws Amendment Bill has been published for comment by the 8th August 2016.
The Bill introduces a new section to the Income Tax Act to address the avoidance of estate duty and donations tax by the transferring of assets to a trust by way of interest free or “soft” interest loans.
It has been a common and legitimate practice for estate planning purposes for individuals to transfer assets to a trust in order to ultimately avoid estate duty.
In order to avoid donations tax, the assets are generally sold to the trust at a market related price. If the trust does not have the means to pay for the acquisition of the assets then it is common for the purchase price to be loaned to the trust, generally by the owner/seller of the assets.
These loans are generally at no interest alternatively a low interest rate is payable on the loan by the trust. The result is that the seller will not have to pay income tax on the interest income, and also benefit from the reduction of estate duty by the reduction of the seller’s assets.
It is also common for the seller to donate amounts to the trust annually to set off against the capital amount of the loan. These donations would be exempt from donations tax if they fall within the annual R 100 000.00 exemption.
The proposed amendment seeks to address the above scenario and provides that where no interest is charged on the loan, or where the interest rate charged is lower than the official interest rate (currently 8%), the seller will need to declare an amount equivalent to the difference between the interest payable by the trust and the amount that would have been payable had the official rate been charged, as income. The seller can recover this amount from the trust.
However a donation is deemed to have taken place if the interest is not recovered from the trust within 3 years and this will result in donations tax been payable by the seller.
The seller will not be able to claim the interest income, which is regarded as income for the seller, as part of the donations tax exemption.
Furthermore the loan to the trust will not qualify for the annual R 100 000 donation tax exemption.
If the amendment is passed, it will mean that interest free loans to trusts will become a less attractive way of providing trusts with capital given the harsh tax implications for the lender.
If the proposed amendment is passed into law it will come into effect on 1 March 2017 and will apply to subsequent years of assessment.
This is a BDE legal update to keep our clients apprised of recent developments in the law. Please be advised that this does not constitute legal advice and we encourage you to contact one of our experienced attorneys should you require further advice.
Nicola de Oliveira
BRIMELOW DE OLIVEIRA EKEROLD ATTORNEYS