“Let me tell you how it will be
There’s one for you, nineteen for me
‘Cos I’m the taxman, yeah, I’m the taxman”
(The Beatles – ‘Taxman’)
For many years government has been hostile to trusts. In the latest draft Bill of 2016 taxation amendments, a provision has been inserted on trusts.
Be aware that this has not passed into law but it will have a fundamental impact on trusts if enacted as it stands. This early warning gives you more time to consult with your tax adviser.
The proposed changes:
- An individual or a connected entity that makes an interest-free or low interest rate loan to a trust will be taxed from 1 March 2017 (if the provisions are passed unaltered). The tax will be the difference between the SARS interest rate of 8% (note this is subject to change) and the interest amount charged,
- If you are taxed under this provision, you have 3 years to recover the tax paid from the trust. If the tax is not recovered, the taxed amount is treated as a donation in your hands as taxpayer.
An example illustrates
Assume you make a R1 million tax-free loan to a trust.
In the next tax year you will be liable for tax on R80,000 (8% of R1 million). Let’s further assume that tax payable on this is R32,000 (40% of R80,000)
If 3 years then elapse and the R32,000 is not recovered from the trust, you will be taxed on a donation of R32,000 and will pay tax of R6,400 (20% donations tax on R32,000)
Note that the interest cannot be offset against your annual interest exemption of R23,800. Neither can the donations tax be part of your annual R100,000 donation tax exemption.
For many years, one of the tenets of establishing a trust has been for the founder to finance it by an interest-free loan with no adverse tax consequences. If the new tax Bill is enacted as is, this will change. Be prepared!