Trusts & Loan Accounts: The Deadline Looms
In broad terms, section 7C (which applies from 1 March 2017) deems interest on certain loans made to a trust to be a donation in the hands of the lender, which is then subject to donations tax.
Step 1 Identify any affected loans
If you have transferred assets into your trust by way of an interest-free (or low interest) loan, you may well be affected by section 7C.
• refinements to section 7C propose this section will also apply to loans made by a natural person (or by a company at the instance of a natural person) to a company, where the company itself is a connected person in relation to the trust (eg; the trust owns the shares in the company).
• A further proposal is that a natural person who acquires a claim to an amount owing by a trust will be treated as having provided that loan to the trust (so transferring the loan to another natural person will not break the link).
These proposals, outlined in the Taxation Laws Amendment Bill, 2017, will, when the Act is passed, be with effect from 19 July 2017.
Step 2 Establish whether the loan falls under any of the exclusions
For example, where the trust used the loan to acquire a residence and either the lender or his/her spouse has resided in that residence for a full taxable year as a primary residence.
Step 3 The way forward
Accounting: examine and amend financial statements where necessary, by splitting out what are credit liabilities, and what are beneficiary loans.
Legal: examine and amend the trust deed where necessary, to ensure the trustees have a discretion to vest amounts in a beneficiary and a further
discretion as to when the vested amount will actually be distributed.
It is essential that clients with loan accounts in trusts seek legal and accounting advice before the end of the 2018 tax year (28 February 2018).
Article By Hannah