Section 7C of the Income Tax Act, No 58 of 1962 (the Act), was enacted effective 1 March 2017 and serves as an anti-avoidance measure aimed at curbing the tax-free transfer of wealth to trusts through the use of low interest or interest-free loans, advances or credits. The Explanatory Memorandum on the Taxation Laws Amendment Bill 2017 indicates that a loan, advance or credit is often used as a means of transferring wealth from an individual to a trust, often with the trust not having any intention of repaying anything and leaving the loan, advance or credit in place indefinitely.
The provisions of section 7C, therefore, apply in respect of any loan, advance or credit that a natural person, or at the instance of that natural person, a connected company, has directly or indirectly provided to a trust, or a company under certain circumstances. Should none of the exclusions in section 7C apply and the loan, advance or credit does not carry interest or carries interest at a rate lower than the “official rate of interest”, a deemed donation to the trust arises. The value of the donation is the difference between interest actually charged, and interest that would have been charged, had the “official rate of interest” applied.
Section 7C(5) contains eight exclusions, where a loan, advance or credit will not be subject to the onerous consequences as outlined above, despite meeting the criteria of section 7C.
One of the more pertinent exclusions is where the loan was used by a trust or company (wholly or partly) for purposes of funding the acquisition of an asset that is used by the natural person (or their spouse) as a primary residence. Section 7C(5)(d), does not contain any “ownership” requirements, merely a “use” requirement. Therefore, as long as the relevant persons used the asset as a primary residence, the exclusion applies. Importantly, the exclusion in section 7C(5)(d) contains a time and amount restriction and only applies if the residence was used as a primary residence throughout the period during a year of assessment during which the trust held the asset and only to so much of the loan, as was used to fund the immovable property.
There is some uncertainty on whether a loan that funded improvements or additions to the primary residence will qualify for the exemption since the Act merely refers to the “acquisition” of an asset. Taxpayers should, therefore, seek appropriate advice before relying on the exclusion in these circumstances.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)