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TRUSTS: BEWARE INTEREST FREE LOANS

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Article by listed accountant  Liza Wood

Major tax implication for Trusts (1 March 2017)

The 2016 Draft Tax Amendment Bill introduces a new section to prevent Estate Duty and Donations Tax avoidance through the transfer of assets to a Trust on interest free loan account.

Many trusts have acquired assets via a related party loan account (as opposed to a donation subject to Donations Tax). The liability in the trust books of account is now subject to SARS’ scrutiny.

The new amendments have far reaching tax effects for lenders to trusts.

Loans that carry interest at the official interest rate:

Should such loan carry interest, of at least the official rate (currently 8%), then the interest is  taxable in the hands of the lender, and may be deductible in the hands of the trust (if in the production of income).
 

Loans that carry interest at less than the official interest rate (or interest free):

Should such loans carry interest at less than the official rate, the shortfall in interest is taxable in the hands of the lender. This is not deductible in the hands of the trust. Further the lender may not utilise the interest exemption against this deemed taxable amount. The lender may claim the tax paid on the deemed income from the trust. If it does not make this claim within 3 years the amount is deemed to be a donation and subject to donations tax at 20%

Capital losses:

Lenders are prohibited from claiming capital losses which arise out of a reduction or waiver of the loan, or failure (by the Trust) to repay the loan.
 

Annual donation tax exemption:

The annual exemption of R100,000 donation is often used to reduce loans to the trust. This will no longer be allowed where the lender donates any amount which reduces the loan capital.
 

These amendments are not finalised, however it seems unlikely to change. As a result careful consideration needs to be given to these loans in the near future, and restructuring may be required.