Section 7C of the Income Tax Act came into effect from 1 March 2017. This section has an impact on interest-free loans to Trusts or loans where interest is charged at a rate lower than the “official rate” (currently 8%). The difference between the interest rate charged, if any, and the official rate will be deemed as a donation and will attract donations tax of 20%. Some relief can be obtained by using the annual donations tax exemption of R 100,000.
Many of the Trusts we administer reflect in the financial statements interest-free loan accounts which are made up partially or fully of unpaid distributions of income or capital gains. We believe that unpaid distributions fall outside the definition of a “loan” in the legislation. In many instances, therefore, there will be merit in redrafting the financial statements to clearly separate “unpaid distributions” from “loans”. The unpaid distributions will be disclosed as “Vested Retained Income” and will not be impacted by Section 7C.
Those clients who feel that Section 7C will have an impact on their tax situation are welcome to contact us to discuss their situation.
