We have identified a risk that relates to any loan, advance or credit made to a trust, by a natural person or a company that is a connected person to the trust where interest is not charged, or interest is charged at a lower rate than the official rate (currently 7.75% based on the repo rate plus 1%). In terms of Section 7C of the Income Tax Act that came into effect on 01 March 2017, the difference in interest between the official rate and what is charged will be deemed to be a donation made on the last day of the year of assessment of the trust. Donations Tax will be payable at a rate of 20% on the interest differential by the person granting the loan by 31 March of each year.
SARS published an Explanatory Memorandum which states the following with respect to distributions to beneficiaries:
“An amount that is vested irrevocably by a trustee in a trust beneficiary and that is used or administered for the benefit of that beneficiary without distributing or paying it to that beneficiary will not qualify as a loan or credit provided by that beneficiary to that trust if:
- the vested amount may in terms of the trust deed governing that trust not be distributed to that beneficiary, e.g. before that beneficiary reaches a specific age; or
- that trustee has the sole discretion in terms of that trust deed regarding the timing of and the extent of any distribution to that beneficiary of such vested amount.
An amount vested by a trust in a trust beneficiary that is not distributed to that beneficiary will, however, qualify as a loan or credit provided by that beneficiary to that trust if that non-distribution results from an election exercised by that beneficiary or a request by that beneficiary that the amount not be distributed or paid over, e.g. if the beneficiary has reached the age at which a vested amount must be paid over or distributed to him or her and
- the trustee accedes to a request by that beneficiary that this not be done; or
- the beneficiary enters into an agreement with the trustee in terms of which the amount may be retained in the trust.”
We are in the process of reviewing our client’s Trust Deeds and attending to relevant changes to minimise the risk of Section 7C of the Income Tax Act being applied, based on our understanding of the requirements of the Section. We estimate that our time to amend the required clauses of the Trust Deed, attend to the required resolutions and the required correspondences with the Master of the High Court will amount to R2,000 excl. VAT.
We will also ensure the correct disclosure of these vested amounts in the financial statements in line with the amendments and to reflect the true substance of these amounts.
Please contact us should you require our assistance in this regard.