Anti-avoidance rules on trusts tightened – again
The use of trusts by especially high-networth individuals for purposes of estate planning and tax structuring has annoyed National Treasury and Sars to no end.
Major anti-avoidance measures have been introduced in recent times. The latest measure to curb the tax-free transfer of wealth to trusts through low-interest or interest-free loans was introduced into the Income Tax Act last year.
Under these schemes taxpayers would transfer assets to the trust, and the trust would owe the taxpayer a loan, which may or may not be repaid at a non-existent or low interest rate.
This meant donations tax, normally levied at 20%, was avoided. The anti-avoidance measure that came into effect on 1 March effectively means an ongoing and annual donation tax is triggered whenever interestfree loans, advances or credit with low rates are made to a trust.
Since March, the below-market portion of interest triggers donations tax of 20%. Treasury has proposed measures to tighten these rules in the draft Taxation Laws Amendment Bill, published in July.
Treasury says it has come to government’s attention that taxpayers have discovered ways to avoid the deemed annual donations triggered by the anti-avoidance measure. Taxpayers have apparently advanced interest-free or low-interest loans to companies whose shares are held by trusts. By advancing the loan to the company rather than the trust, the anti-avoidance measure will not apply as it currently only applies to loans advanced to trusts.
“As such, the fiscus will forego the ongoing and annual donations tax on the deemed donation. These companies benefit from this low- or no-interest funding and tax can only be collected at a much later stage when the company makes distributions to the trust.”
Taxpayers have also transferred the claim of the loan to the trust to another person who is also a beneficiary of the trust, arguing that the transfer breaks the link between the person who made the loan, and the loan.
The person to whom the loan claim has been transferred cannot account for the deemed donation, as that taxpayer did not advance the loan to the trust.
It was proposed to tighten existing measures with effect from 19 July. According to the South African Institute of Tax Professionals (SAIT), the measures will catch interest-free and low-interest loans made to companies owned by trusts where the parties are connected.
Arrangements where the loans to a trust are transferred to another beneficiary to break the link will now also be caught.
“The wording of the draft bill might have to be tweaked to ensure that these antiavoidance measures do not go further than intended,” says SAIT. ■