These loans are often not repaid and carry low or no interest rates. This creates a taxable event (low or no interest being paid on the loan account), whereby the deemed interest on those loans payable by a trust to a connected natural person should be taxed as a donation (difference between actual interest charged and SARS published interest rates).
As of 1 March, 2017 section 7C was implemented which applies to any loan, advance, or credit directly or indirectly provided to a related trust by a connected natural person or by a company connected to that natural person.
As of 19 July 2017, loans provided by natural persons to companies held by trusts or to loans ceded to connected natural persons such as trust beneficiaries are included.
As of 1 January 2021, where a natural person or a company that is a connected person in relation to that natural person, subscribes for a preference share in a company in which 20 percent or more of the equity shares are held (whether directly or indirectly) or the voting rights can be exercised by a trust that is a connected person in relation to that natural person or to that company, whether alone or together with any person who is a beneficiary of that trust the consideration received by or accrued to that company for the issue of that preference share shall be deemed to be a loan and any dividend or foreign dividend accrued in respect of that preference share shall be deemed to be interested in respect of the loan.
This section has the effect that should no interest or low interest be incurred on this loan the difference between market-related interest (at the official rate) and the rate of interest that has been charged will be treated as a donation. This deemed donation applies to new and existing loans, excluding
Example: An interest-free loan of R2,5 million provided to a trust on 1 March 2020 and the loan remained constant during the year, the calculation is:
As trusts have a February year-end, the Donations Tax will be due and payable on 31 March 2021. It is therefore important that these loans be considered now to ensure no penalties or interest arise due to late payment of donations tax.
If you need to speak to us about a general query fill in the form below and we will call you back within the same working day.