As accountants we are very much aware that loans to shareholders by their company need to bear interest, otherwise the interest is deemed to be a dividend and subject to Dividends Withholding Tax.

But what I missed until recently is that, because trusts are defined as “persons” in the Income Tax Act, this also apples to loans by companies owned by a trust to the trust itself.

Normally, this would never happen as, why would the trust need a loan? However, it did come up and I had to go to the Act s64E(4)(a) and (b) to unscramble my head.

(4)  (a)  Where, during any year of assessment, any amount is owing to a company by—

(i)   a person that is—

aa) not a company;

(bb) a resident; and

(cc) a connected person in relation to that company

in respect of a debt, that company must, for the purposes of this Part, be deemed to have paid a dividend if that debt arises by virtue of any share held in that company by a person contemplated in subparagraph (i).

(b)  The amount of the dividend that is deemed to have been paid in terms of paragraph (a) must—

(i)    be deemed to consist of a distribution of an asset in specie; and

(ii)   for the purposes of subsection (1), be deemed to be equal to the greater of—

(aa) the market-related interest in respect of that debt, less the amount of interest that is payable to that company in respect of that debt for that year of assessment; or

(bb) nil.

What does this mean in plain English?

Loans by a company to its shareholder(s) who are persons, or trusts or to persons connected to such shareholder(s) must bear interest at least at SARS’ official rate. Any shortfall in this charge is deemed to be a dividend paid to the shareholder(s) and is subject to Dividends Withholding Tax.

This would also appear to apply to loans arising from the R100 000 a year donations that were made “on loan” to the company, but I’ve never known SARS to stretch the letter of the Act that far.