The reward of energy, enterprise and thrift is taxes.
The Taxation Laws Amendment Act No. 15 of 2016 (promulgated on 19 January 2017), introduces Section 7C into the Income Tax Act, 1962.
Who needs to know about this?
Any person who has made a loan or advance to a trust, in relation to which that person is a connected person (ie; is a beneficiary of the trust or any relative of such beneficiary).
What is the trigger?
Where such a connected person has made an interest-free or low-interest loan to the trust (where interest is charged at a lower rate than the official rate of interest, currently 8%).
What are the implications?
An amount equal to the difference between the amount incurred, and the amount that would have been incurred at the official rate of interest, must be treated as a donation made to the trust by that person.
This donation will be deemed to have been made on the last day of the year of assessment.
What does this mean for me as a beneficiary of a trust?
Section 7C will not apply where trustees distribute income and/or capital to a beneficiary in terms of the powers granted to them in the trust deed, and only pay over such funds when the trustees, in their discretion, elect to do so.
However, if a beneficiary requests that the amount not be paid over to him, the section will apply.
There are other important exemptions, for example …
The provisions do not apply if:-
- The trust is an approved Public Benefit Organisation;
- The trust is a special trust, as defined (ie; a trust solely for the benefit of one or more persons with a disability, where such disability incapacitates him/her from earning sufficient income for their maintenance);
- The beneficiaries have a vested interest in the trust (there is no discretionary power);
- The trust used the loan wholly or partly for the purpose of funding the acquisition of an asset, which asset was used, throughout the year of assessment, by the person granting the loan (or his or her spouse), such as a primary residence.
The section is set to come into operation on 1 March 2017, and will apply in respect of any amount owed by a trust in respect of a loan or advance provided to the trust before, on or after that date.
These changes may well affect you. If in any doubt, we encourage you to consult with our Trust expert, Hannah Szudrawski.
Article By Hannah Szudrawski
Tel: (033) 3553166