Sars unrelenting on trust focus

At no point in recent memory has the South African Revenue Service (Sars) been so persistent in targeting the perceived abuse of trusts. With the imminent introduction of new trust legislation (s7C), taxpayers are scrambling to find commercially justifiable solutions to limit its application.

Section 7C is an anti-avoidance measure to curb tax-free transfers of wealth to trusts through the use of low or interest-free loans. Any interest foregone as a result of the low or interest free loan, which was provided by a connected person, is treated as a donation subject to a 20% tax. Section 7C does not apply where the loan is owing by a company to an individual.

A solution proposed by several tax advisors was to utilise the corporate roll-over relief provisions in the Income Tax Act to transfer assets (acquired by the trust on interest free loan account) to a newly incorporated company (“Newco”).

As part and parcel to the transfer, the Newco also assumes the loan as part settlement. This transaction (an “asset-for-share transaction”) involves the disposal by the trust of an asset for Newco shares and assumption of the loan claim.

Unfortunately it seems Sars has got wind of this. During the 2017 budget speech it was held that additional measures will be implemented to counter the perceived abuse.