Proposed Tax Changes Affecting Trusts

VAT Compliance
August 29, 2016
Income and a “Rule of Thumb”
August 29, 2016

A3_bOn 8th July 2016, the National Treasury and the South African Revenue Service (SARS) published for public comment the final two bills to give effect to the tax proposals announced by the Minister in the 2016 Budget.

The Standing Committee of Finance will convene public hearings in the second half of August 2016 on these draft bills before their formal introduction in parliament.

Included in the draft bills are proposals to prevent tax avoidance through the use of trusts.

Interest free loans or loans with interest below-market rates made directly or indirectly to a trust by a natural person, or by a company that is a connected person in relation to that person will be regulated as follows:

  • An amount equal to the difference between the official interest rate and the below-market rate of the loan to a trust will be regarded as income accrued or received by the seller.
  • As there is no actual payment of interest by the trust to the seller, no deduction may be claimed by the trust.
  • In the case of below-market interest loans, only the amount of interest that is actually paid by the trust to the seller can be claimed as a deduction.
  • Interest free loans or below-market interest loans to trusts will not qualify for the current R100,000 annual donations tax exemption.
  • The amount of normal tax attributable to the income which is included in the income received or accrued to the seller may be recoverable by the seller from the trust as the trust benefits from the low or no interest charge. If the seller does not recover this amount of tax from the trust within a period of three years after the end of the year of assessment in which the income was included in the income of the seller, the tax attributable to that income will be treated as a donation by the seller.

The proposed amendments will come into effect on 1 March 2017 and will apply in respect of years of assessment ending after that date.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)