Entrepreneurs could feel the pinch of new trust laws

Entrepreneurs advancing interest-free funds to a company, held by a trust of which he/she is a beneficiary, will be affected by the proposed legislation curbing the tax-free transfer of wealth to trusts. “This is a common practice," says Tertius Troost, tax consultant at Mazars.

Tertius Troost, tax consultant at Mazars

He explains that Treasury’s proposed amendments to trust legislation, housed in Section 7C of the Income Tax Act intends to stop several inventive methods that taxpayers have found to avoid the additional donations tax payable in terms of Section 7C.

“Section 7C taxes a notional amount, which is the difference between the interest determined with reference to the official rate of interest (currently 7.75% per annum) and the actual interest rate of the loan, as a donation subject to 20% donations tax.”

He adds that Section 7C currently only finds application when a natural person, or a company under certain circumstances, provides a low interest or interest-free loan, advance or credit to a trust to which that person is connected. “One method identified by National Treasury to circumvent the application of Section 7C, would be to shift the investments originally held by the trust to a company of which the trust is a shareholder. The money advanced to the company would thus fall outside the ambit of Section 7C.”

In order to curb this avoidance, Troost explains that Treasury has now proposed that Section 7C should be applicable if a low interest or interest-free loan, advance or credit is made to a company which is a connected person in relation to a trust. This would happen if for example, the trust holds all the shares in the company.