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Such policies should however be clearly defined and understandable
to employees and it is advisable that you obtain the assistance of a
specialist to help correct word your policies for your business.

Is the interest-free loan to a trust dead?

February 2017

Commercial “For estate planning purposes a few years ago I moved some
of my assets into a family trust and financed the disposal to
the trust with an interest free loan in my name. I understand
that recent tax amendments will now impose unfavourable
tax consequences on me in relation to this interest free loan.
Is this true?”

You are correct. A new Section 7C has been introduced into the Income
Tax Act 58 of 1962 as an anti-avoidance provision to discourage the
use of trusts for estate planning purposes. Section 7C is effective from
1 March 2017 and will apply to any loans, advances or credit provided
either directly or indirectly by certain persons to their trusts, before, on or
after 1 March 2017.

Traditionally, the disposal of assets to a trust by way of a low interest or
interest free loan would not trigger adverse tax consequences for the
individual or the trust. The loan could be discharged over the period of
a few years by natural persons donating R100,000.00 per year to the
trust (such donation amount is exempt from tax). This estate planning
mechanism allowed individuals to reduce their asset base by employing
the exemption from donations tax to extinguish the loan and reduce
their tax base.
Section 7C now applies where there is an interest free loan or a loan
which is repayable at an interest rate below the official rate (currently
set at 8%) by certain connected persons to their trusts. The difference
between the set interest rate and the official rate is regarded as a
donation which will attract donations tax levied at a rate of 20%.

A natural person as well as companies that are connected persons in
relation to a natural person, or any other person that may be regarded
as a connected person in relation to a natural person or company, will
be regarded as “connected persons” for the purposes of section 7C.
Section 7C then prevents the individual from claiming any deduction,
loss, allowance or capital loss in respect of the loan to the trust, resulting
in individuals being barred from cancelling or waiving loans which would
have the effect of reducing their asset base for estate duty purposes.

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