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Treasury's plan to target trusts gains momentum - tax expert

Jul 24 2017 10:04

Cape Town - The Draft Taxation Laws Amendments Bill, issued by National Treasury last week, includes further changes that will curb the tax-free transfer of wealth to trusts through the use of a low interest or interest-free loan.

“It seems that National Treasury remains steadfast in limiting the transfer of wealth over generations without the payment of a form of wealth tax, be it estate duty or donations tax,” says Tertius Troost, tax consultant at Mazars.

Troost explains that Treasury’s proposed amendments to trust legislation, housed in Section 7C of the Income Tax Act, intend to stop a number of inventive methods 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,” Troost explains.

READ: Double tax may be on cards for South Africans who work overseas

Section 7C is currently only applicable 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,” says Troost.

READ: Is a trust still effective?

In order to curb this avoidance, 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 entity in relation to a trust. This would happen if, for example, the trust holds all the shares in the company.

“This proposed amendment will have far-reaching effects if implemented. It is common practice for an entrepreneur to advance interest-free funds to a company which is held by a trust of which the entrepreneur is a beneficiary,” says Troost.

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