Trea­sury backs down on plan to de­ter in­ter­est-free loans to trusts

Weekend Argus (Saturday Edition) - - FRONT PAGE -

Na­tional Trea­sury has sub­stan­tially soft­ened its pro­posal to end in­ter­est-free loans to trusts that can be re­paid or writ­ten off over a num­ber of years, re­sult­ing in an es­tate duty and dona­tions tax sav­ing for those who make use of these loans.

An ini­tial draft of the Tax­a­tion Laws Amend­ment Bill re­leased in July pro­posed that, from March next year, if you make an in­ter­est-free loan to a trust, you would be deemed to have re­ceived in­ter­est at the of­fi­cial in­ter­est rate, and this in­ter­est would be added to your tax­able in­come.

In the case of a low-in­ter­est loan, the dif­fer­ence between the in­ter­est charged and the of­fi­cial in­ter­est rate would be added to your in­come.

The of­fi­cial in­ter­est rate is cur­rently eight per­cent a year.

Trea­sury also pro­posed in its ini­tial draft bill that you would not be able to use the R100 000 an­nual dona­tions tax ex­emp­tion to write down up to R100 000 of a loan made to a trust each year.

When the pro­posal was first made, David Warneke, the head of tax tech­ni­cal at BDO South Africa, warned that it could re­sult in trusts be­ing wound up.

In a re­sponse doc­u­ment pub­lished on its web­site this week, Trea­sury says that com­men­ta­tors pointed out that the mea­sures to stop in­ter­est-free and low-in­ter­est loans were aimed at pre­vent­ing the avoid­ance of dona­tions tax, not in­come tax. It has there­fore de­cided that the deemed in­ter­est should be treated as an an­nual do­na­tion.

A sec­ond draft bill, which was re­leased for comment this week, has been amended to re­flect that the deemed in­ter­est will be treated as an on­go­ing do­na­tion with ef­fect from March next year.

Trea­sury has also back­tracked on its de­ci­sion to deny those who make loans to trusts the right to use the an­nual dona­tions tax ex­emp­tion to write down the loan. This was in re­sponse to com­ments that this pro­posal would af­fect all loans made to trusts, not only low-in­ter­est or in­ter­est-free loans.

In terms of the sec­ond draft bill, you will be able to use the R100 000 an­nual dona­tions tax ex­emp­tion to off­set dona­tions to a trust, but you will have to in­clude the deemed in­ter­est on the re­main­ing loan in the R100 000, or it will be re­garded as a tax­able do­na­tion.

It is com­mon prac­tice for peo­ple who want to place an as­set worth more than R100 000 in a trust not to do­nate the as­set to the trust, be­cause they would be li­able for dona­tions tax at a rate of 20 per­cent on the value of the as­set that ex­ceeds the an­nual ex­emp­tion of R100 000. In­stead, they make an in­ter­est-free loan to the trust so that the trust can buy the as­set. They then write down R100 000 of the loan each year as a do­na­tion to the trust.

This also en­ables them to re­duce their es­tate duty li­a­bil­ity by peg­ging the value of their es­tate to the value of the loan ac­count. Growth in the value of the as­set will oc­cur in the trust. This can re­sult in a sav­ing on es­tate duty if their es­tate is val­ued at more than the es­tate duty ex­emp­tion of R3.5 mil­lion, or R7 mil­lion per cou­ple.

In com­ments on the ini­tial pro­posal, tax prac­ti­tion­ers and other in­ter­ested par­ties pointed out that trusts are not only used to avoid es­tate duty, but also to pro­vide main­te­nance for chil­dren with dis­abil­i­ties, for pu­bic ben­e­fit or­gan­i­sa­tions (PBOs) that do char­i­ta­ble work, as em­ployee in­cen­tive trusts, by busi­ness-peo­ple who want to pro­tect their per­sonal as­sets from busi­ness cred­i­tors, or to pro­tect as­sets from a delin­quent child who would oth­er­wise squan­der them.

Trea­sury ac­cepted that these com­ments were valid and said it would nar­row the ap­pli­ca­tion of the pro­posed amend­ment to en­sure that it will specif­i­cally ex­clude, among oth­ers, loans to:

• Spe­cial trusts that are es­tab­lished solely for the ben­e­fit of per­sons with dis­abil­i­ties;

• Trusts that are PBOs as de­fined by law;

• Vest­ing trusts (where the vest­ing rights and con­tri­bu­tions of the ben­e­fi­cia­ries are clearly es­tab­lished);

• A trust to fund the pur­chase of the lender’s pri­mary res­i­dence; and

• A trust that pro­vides for a s h a r i a - c o mpl i a n t f i n a n c i n g ar­range­ment.

Tax prac­ti­tion­ers also com­mented that it was not clear whether the draft bill ap­plied to loans made to ex­ist­ing trusts, and that if it did, this would be un­fair, be­cause peo­ple who wanted to un­wind these trusts would in­cur cap­i­tal gains tax when the as­sets in the trust were sold. Trea­sury did not ac­cept this ar­gu­ment, say­ing the pro­posed pro­vi­sion would ap­ply to ex­ist­ing loans.

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