The Proposed Amendments to the Draft Taxation Laws Amendment Bill
NOTE: The following article is an extract from information circulated by Galbraith Rushby on 21 July 2017
In this, the second part in our summary on the much-anticipated Draft Taxation Laws Amendment Bill, that was released on Wednesday 19 July, Galbraith Rushby discuss the second proposed amendment, as follows:
Refinement of section 7C amendments with interest-free loans to trusts
Without going into too much detail on section 7C again, SARS introduced section 7C with effect 1 March 2017 and this was to target no- or low-interest loans to trusts. The driver of the amendment was SARS view that interest-free loans to trusts were a nefarious way for taxpayers to avoid Estate Duty.
As with all new amendments, people tried to structure their affairs to make sure they did not fall foul of those amendments and SARS probably sat in on all those tax talks given on how to get around section 7C. They have therefore proposed to amend section 7C to target those ‘anti-avoidance’ measures taxpayers were taking.
There are two so-called ‘schemes’ SARS is targeting with the amendments:
- Interest-free loans, advances or credit and low-interest loans, advances or credit made to companies owned by trusts
SARS is of the view that these loans to companies whose shareholder (or ultimate shareholder) is a trust are getting a benefit from not paying interest on that loan and the purpose of that interest-free loan (in the context of section 7C) is estate duty avoidance.
The proposal therefore in SARS words is the following:
“It is proposed that interest-free or low-interest loans, advances or credit that are made by a natural person or a company (at the instance of a natural person) to a company that is a connected person in relation to a trust should also fall under the anti-avoidance measure.”
The wording for me here seems to be a bit of a mine field and I cannot see it coming in as it currently states. The problems I have are:
- The original section 7C has some exclusion and that interest-free loans for the acquisition of primary residence and interest-free loans to special trusts are excluded. The amendment does not say what would happen if a trust owns a company and that company owns the primary residence, would interest-free loans to that company be excluded? Currently not, but hopefully just a legislative oversight.
- How would interest-free loans to a company operating a business be viewed if the business is owned in a trust?
- How would a loan advanced from one company within a group to another company within the group if the shareholder of both is a trust be handled?
This seems to be a bit rough around the edges but in essence interest-free loans to companies within a trust structure are now also a target of this amendment.
- Transfer of loan claims to current or future beneficiaries of trusts
Let’s assume Sam Smith lends R1 million to ABC Trust and wanted to get around section 7C. He would transfer his loan claim to his wife, Sally Smith. The argument was that although Sally is owed the money now, she did not initially lend the money to the trust and therefore here obligation to receive payment back was not subject to section 7C.
The amendment now specially includes this type of loan shuffling into section 7C.
The effective date of these changes is 19 July 2017 so it is already in place. Based on the current wording I think there are far reaching (intended or unintended) implications for companies conducting trade and companies owning property whose shareholding is held by a trust. With the legislation already in effect (despite public comment only ending in August) we can either assume this remains as is or hope that it will be amended. Either way its problematic.
My personal view is that this amendment is a bridge too far. Anti-avoidance legislation should not have a negative implication for normal business in the attack on the few people trying to circumvent section 7C. By way of an illustrative example:
- John inherited some money and purchased a piece of land for R10 million into a company which is owned by his family trust. His plan was to hold the land for some years and then develop it. He paid transfer duty on the acquisition of the land.
The amendment now says that because it’s owned in a company whose shareholder is a trust he must charge interest on that loan. The problem is the following:
- The property is just land and is not generating any income. The interest he would have to charge would be R80 000 per year incurring him personal tax implications of +/- R300 000 per year; or
- He pays donations tax of R160 000 per year on not charging interest; or
- He transfers the property out of the company back into his personal name but then he would have to pay transfer duty again and capital gains tax.
He could have owned the property for years and now being caught up this new tax, it’s a bit unfair.
Author: Galbraith Rushby