Can I donate R100 000 to my trust’s new company before the trust is formed
This question arises because it only takes about a week to form a company but 6 to 8 weeks to form a trust.
You want your trust to own this new investment company, but only the company has been formed. The trust is still in process at the Master’s office.
The end of February is approaching and you and your spouse each want to make the R100 000 donation to the company on loan account before the tax year ends.
If you miss the deadline, that’s R200 000 loan account missed.
So, you make the donation and the trust is formed later. Now what?
The company is worth R200 000, so you can’t donate it to the trust as that would use up another year’s Donations Tax exemption, so you have to sell it to the trust for R200 000. The trust now owes you R200 000 and you owe the company R200 000.
Life is beginning to get complicated!
Because of s7C of the Income Tax Act, you have to charge the trust interest on what it owes you at least at the official rate of 1% above the Repo rate, but the company does not have to charge you interest on what you owe it.
The trust does not earn taxable income (heck, it’s not even registered as a taxpayer) from which it can deduct the interest, but you will pay tax on the interest earned (unless you still have some unutilised interest allowance).
So yes, it can be done, provided whoever does your books and tax returns knows what they are doing, but it would be far better to make sure that your trust is registered before the end of the tax year.
The scenario is then –
- You form the company with you as the shareholder.
- The trust is formed.
- You donate the shares to the trust. They aren’t worth anything.
- You donate R100 000 on loan account to the company before the end of February.
Much simpler!
4 comments
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Hi Derek,
A very interesting point you’ve made here Carl, thank you – I didn’t know this. Can a company legally trade without any shareholders? I suppose if this is legally possible, it would be counterintuitive as prior to the formation of the trust, the company would have value and thus the later issued shares would carry value?
Kind regards,
David.
Hi David,
I find no requirement in the companies act for a company to issue shares, despite the heading of s35 which reads –
“Legal nature of company shares and requirement to have shareholders”. You can easily find the Act on Google and check that section. I think it’s another example of the appalling standard of legal drafting that we have in SA. You may recall that they first wrote the Act on about 300 pages, then they had to write a whole bunch of “Regulations” AKA “bits we missed out” on another 300 odd pages. Whenever I see that name Rob Davies, I cringe. You remember that he was also responsible for the B-BBEE Act which was so badly written that I (and subsequently SAICA) distanced myself from being a B-BBEE auditor.
Having said all that, in my view there’s no problem with making the donation before the trust is formed, provided no shares have been issued. However, if you first issue the shares to yourself, then transfer them once the trust has been formed, the value of the company will have gone from R100 or R120 as the case may be to R100 120 and you will have made a capital gain which is subject to CGT.
An interesting thought. There is no requirement in terms of the Co Act for a company to issue shares until it is ready to do so. So an option exists to establish the company without a shareholder, make the donations now, and once the Trust is in place, issue the shares to the trust at that time.
Hi Carl, Yes we still do that quite often. However, many clients feel uncomfortable with this, so we’ve tended to move away from it despite it being correct.