Anti-avoid­ance rules on trusts tight­ened – again

Finweek English Edition - - Cover Story -

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. ■

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