With effect from the start of the 2018 financial year, i.e. 1 March 2017, SARS has introduced a new section to the income tax act which states that interest will need to be charged on trust loan accounts.
This section of the income tax act states that the lender needs to charge interest on loans made to the trust, at the official rate of interest. The official rate of interest is stated as being the repo rate plus 100 basis points. For the period 1 March 2017 to 31 July 2017 the repo rate was 7% (Official rate: 8%), and from 1 August 2017 to 28 February 2018 the repo rate was 6.75% (Official rate: 7.75%).
This section also states that the difference between the official interest rate, and the actual interest rate charged will be deemed a donation in the name of the lender, thus triggering donations tax at 20%, if the deemed donation exceeds R100,000.00 for any year.
There are, however, certain exemptions to section 7C, and they are as follows:
– Special Trusts created solely for the benefit of minors with a disability;
– Loans made by a trust beneficiary of a vesting trust provided that certain qualifying provisions are met;
– Trusts that are approved public benefit organisations;
– Loans that were made to acquire a primary residence;
– Qualifying Sharia compliant financing arrangements;
– Affected transactions, as per section 31;
– The loan is subject to the provisions of section 64E(4).
A simple example to explain the essence of section 7C would look as follows:
Mr. X made a loan to the ABC trust on 1 March 2017, in the amount of R500,000.00. There were no changes in the loan throughout the 2018 financial year, and no interest was charged on the loan.
This situation would lead to a deemed donation as no interest was charged, but this should have been charged at the official rate.
1 March 2017 – 31 July 2017: nbsp; 500,000.00 x 8% x 5/12 = 16,666.66
1 August 2017 – 28 February 2018: 500,000.00 x 7.75% x 7/12 = R22,604.16
Interest that should have been charged: 39,270.82
Interest actually charged: R0.00
Deemed donation: 39,270.82
Mr. X will then be seen as having made a deemed donation to the trust in the amount of R39,270.82, as he did not charge interest on the loan account. As the first R100,000.00 on donations are exempt – Mr. X will not incur any donations tax in the above example.
This is a very simple example, and most clients will have more complex calculations, as their loan accounts vary throughout a year.
Part of Topaz Accounting’s services include the calculation of the interest that should have been charged and the deemed donations. We will therefore always do all necessary calculations and determine what would be the best way to approach the treatment of section 7C.
If you have any queries regarding the exact workings of section 7C, and the effects of the deemed donations and interest, please contact your accountant at Topaz Accounting, and they will gladly assist you. To get in touch with Topaz, please send a contact request email to firstname.lastname@example.org.