The ‘Immoral’ s7C: Interest on Loan Accounts to Trusts

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This article considers the implications of the proposed s7C of the Draft Taxations Laws Amendment Bill 2016 on trusts, the founders of those trusts, and inter-connected lenders.

Status Quo

It is very common for the founder (or donor) or even beneficiaries of a trust to loan money to it, and then to ‘transfer’ wealth originally held in the lender’s name into the trust by reducing that loan annually using the R 100,000.00 donations tax exemption. This is done to reduce the estate duty and capital gains tax that the lender, as a natural person, would otherwise pay on his or her death on the value of that wealth, and to avoid the donations tax and capital gains tax that such a transfer would normally attract at disposal. In such cases, the loans are ordinarily interest free – as the loan is intended to be used as a mechanism to transfer wealth into the trust without triggering income tax consequences on the interest. At present, there is no ‘penalty’ for founders or inter-connected lenders of trusts who make loans to their trusts at low or zero interest rates.

Proposed s7C

The proposed section will deem the founder or inter-connected lender as having earned interest on such a loan (for which interest the founder or inter-connected lender will be liable to pay income tax) at a rate at least equal to the SARS official rate, which is presently 8%.

In the event that interest is charged, but at a lower rate than the SARS official rate, the difference will be included in the lender’s taxable income.

In addition hereto, s7C(4) obliges the lender to recover the interest amount from the trust within 3 years from the end of the year of assessment in which the loan is extended, failing which it will attract donations tax to be paid by the lender.

Impact on Founders and Inter-Connected lenders

This will be hugely prejudicial to founders and inter-connected lenders who are using the loan as a mechanism to transfer wealth into the trust (without donating it, and without selling it at arm’s length, which the trusts often cannot afford), as they will now be paying income tax on interest that they do not actually earn on a loan that they never actually intended to recover from the trust. This also closes an age old transfer mechanism which validated the use of trusts as a safeguard.

Impact on beneficiaries

Because of the impact that this has on founders and inter-connected lenders (as explained above) it is likely that founders will stop making interest free loans (or low interest loans) to their trusts. This results in the trust having to pay whatever rate of interest is agreed upon (which will be at least the SARS official rate of interest or higher), which ultimately means more tax obligations on the trust and less wealth for the beneficiaries.

Why the change?

SARS is targeting trusts and inter-connected taxpayers with the aim of increasing the tax base whilst combatting abuses by the wealthy who allegedly attempt to avoid tax. There are presently other tax laws that deem the giving of a low interest (or non-interest bearing) loans (or the waiver of such loans) as a donation for tax purposes, and s7C is merely a new manifestation of this principle intended to combat the most commonly enjoyed “trick in the book” to reduce tax by inter-connected lenders.

What can be done about this?

Well, nothing really, other than for founders to agree with the trust in question that the loan will bear interest in future and ensure that the interest is recovered timeously. To the extent that the loan is utilised by the trust to produce income in the trust, the interest on that loan may be tax deductible in the trust’s hands. Again, this is not really a boon – but it’s better than a kick in the pants.


If you are presently a lender in relation to such a loan; or a trustee of a trust with such a loan; or you are contemplating making such a loan, think carefully about the tax consequences of the interest when structuring the transaction, lest you cause yourself or your loved ones; or a founder or inter-connected lender, to pay income tax on interest that is never received!


Chantelle Gladwin
Partner at Schindlers Attorneys
Phone: +27 (0) 11 448 9678
[email protected]

Renand Pretorius
Associate at Schindlers Attorneys
Phone: +27 (0) 11 448 9707
[email protected]

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