Repo rate: the impact on donations tax

The recent repo rate reduction may affect the tax liability of South Africans with an existing loan to a trust, as their donations tax liability decreased.

If you have a rand-denominated loan, you may need to • do a pro-rata calculation if the trust’s loan is subject to the Income Tax Act’s section 7C; and • review any interest rate on loans if these were fixed rather than linked to the official rate before July 21 2017. Section 7C was introduced into the SA Income Tax Act from March 1 this year. It’s an anti-avoidance measure to curb the taxfree transfer of wealth through low-interest or interest-free loans, advances or credit. An annual and ongoing donation is triggered whenever interest-free loans, advances or credit with low rates (or interest free) are made to the trust by a natural person or a company that’s a “connected person” in relation to the natural person who advances the loan, advance or credit to a trust.

The tax is calculated at a rate of 20% on the difference between the actual interest charged on the loan, advance or credit and the interest that would’ve been paid by the trust had interest been charged at the “official rate” of interest as defined in the Act. For a debt denominated in rand, the official rate is equal to the SA repo rate plus 100 basis points (bps). For debt denominated in a foreign currency, it’s a rate equal to the equivalent repo rate for that currency plus 100 bps.

The recent change in the repo rate from 7% to 6.75% means the official rate has decreased from 8% to 7.75%, from July 21 2017

For rand-denominated loans the change in the official rate means: • From July 21 2017, the loan will potentially be subject to Section 7C if the rate’s below 7.75%. Where loans have been structured to be 8% these should be reviewed. If you’re using your R100 000 annual donations tax exemption under Section 56(1) to apply towards the tax due under Section 7C, the exempt amount increases from R1 250 000 to R1 290 322.58 from July 21. This will need to be calculated pro rata for the different periods. This won’t, under normal circumstances, have an impact on loans denominated in a foreign currency.

Graham Patrick is senior client service manager at Maitland •

If you have a rand-denominated loan, you may need to review any interest rate on loans if these were fixed rather than linked to the official rate.