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%
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.
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)