During the past 12 months, a lot has been speculated with regards to the findings by The Davis Tax Committee on trust loans and possible tax effects thereof.
There have been many opinions published over the last year, and as things stand, the following will take effect from 1 March 2017:
- Interest is to be charged on all loans to trusts by connected persons at the SARS Official Rate, which is 1% above the repo rate, currently 8% (7% repo rate + 1%).
- The interest will form part of the taxable income of the lender (the individual connected person), and will be tax deductible for borrower (the trust).
- Should interest be charged at less than the official rate or not at all, the difference between the interest charged and interest that would have been charged at the official rate is taxed as a donation in the hands of the lender, at 20%.
The good news is that the R100 000 annual donation exemption may be applied against interest that should have been charged, for example:
Mr X lends R1 250 000 to the ABC Trust, where he is a trustee. No interest was charged on the loan. The deemed donation in the hands of Mr X is therefore R100 000 (R1 250 000 x 8%). Mr X has not made any other donations during the year of assessment, and therefore the following would reflect in his tax calculation:
|Deemed donations||100 000|
|Annual donations exemption||-100 000|
|Donations tax @ 20%||–|
Another measure available is the annual interest exemption available to individual tax payers – R23 800 if under 65 years of age, illustrated in the following example:
Mr X (50 year old) lends R1 547 500 to the ABC Trust, where he is a trustee. Interest amounting to R23 800 (at 1.538%) was charged on the loan. Mr X earned no other interest during the year of assessment. The following will reflect in his tax calculation:
|Loan value||1 547 500|
|Interest at SARS Official Rate of 8%||123 800|
|Interest levied – actual||-23 800|
|Value of donation||100 000|
|Interest received||23 800|
|Interest – annual exemption||-23 800|
|Interest taxable at marginal rate||–|
|Income tax at marginal rate||–|
|Donations made||100 000|
|Donations – annual exemption||-100 000|
|Donations tax at 20%||–|
In the above example no tax consequences arise, however, the above two examples are very basic case studies. It does however illustrate the fact that a married couple, both under 65, with a basic double trust structure and no other interest-bearing investments, splitting a loan to the trust between them, could potentially lend up to a combined R3 095 000 (R1 547 500 x 2) to their trust without incurring income tax on the interest charge required in terms of section 7C.
I do need to stress again that the above examples are very basic and that a taxpayer’s complete structure needs to be taken into account when planning the most efficient tax structures. There will be cases where it will be, for example, advisable to rather charge the full 8% interest and claim the deduction in the trust, depending on circumstances. There are many possible scenarios, and it will be up to tax practitioners to take tax payers’ full structures and circumstances into account in their planning.