In our previous newsletter we discussed the draft legislation which, if enacted, will result in interest being deemed to be payable on interest-free loans (and loans where interest is charged at a rate below the official rate) to trusts. The effect would be additional income tax payable by the lender.
After public comment had been called for and received, the draft legislation has been amended. The latest draft proposes the following:
- Any loan, advance or credit provided to a trust where interest is either not charged or is charged at a rate lower than the official rate (presently 8%) falls within the ambit of the proposal;
- An amount equal to the difference between the official rate of interest and the interest actually charged will be treated as a donation made to the trust and will be subject to donations tax at a rate of 20% except that the first R100,000 of donations made by a person in any tax year is free of donations tax.
The previous draft proposed that the difference between the official interest rate and the rate actually charged would be included in the taxable income of the creditor and taxed at his/her marginal rate (maximum 41%). 
- Certain loans to trusts are specifically excluded from the proposed legislation. These include:
– Loans to Public Benefit Organisations;
– Loans provided in return for a vested right to the income and assets of the trust;
– Loans to special trusts created for disabled persons;
– Loans used by the trust to acquire a property that is used by the creditor and/or his/her spouse as their primary residence;
– Loans to offshore trusts;
– Loans to trusts that are subject to Sharia-compliant financing arrangements.
- The draft legislation, if enacted, will come into effect on 1 March 2017 and will apply to any loan to a trust that is in or comes into existence on or after that date.
We will now have to wait and see if the draft legislation is enacted and should have clarity on this before the end of the year.
Action to avoid or reduce the tax consequences of this may need to be taken by trustees before 28 February 2017. We will communicate individually with clients in this regard at the appropriate time.
