Changes to the Tax laws relating to loans to trusts
In his 2016 budget Pravin Gordhan advised that there would be changes to the way loans to trusts are dealt with. These proposed changes are now published in the Taxation Laws Amendment Bill 2016.
In a nutshell, from 1 March 2017, you should not make interest free or low interest loans to trusts (they don’t mention companies owned by trusts, but I guess they’ll wake up before the Bill becomes an Act).
Instead you should charge the official interest rate which is currently 8%. This is a journal entry in the company Dr Interest Paid, Cr Loan account. The interest paid will only be deductible by the company if the loan was used in the production of income.
The interest received will be taxable in the lender’s hands (subject to the current annual allowance of R75 650, which equates to the first R945 625 of the loan. For over 65’s the allowance is R114 800 and for over 75s it is R128 500.
The R100 000 donation free of Donations Tax still applies, but only provided you follow the above advice.
Bear in mind that as the Bill stands all of the above applies to loans to trusts not to companies owned by trusts, so we can probably ignore the whole thing in most cases.
Pravin Gordhan also mooted another amendment, but it was so ridiculous that they appear to have dropped it entirely.
I have simplified the above explanation so that it can be readily understood, but we are now clearly moving towards a regime where you simply must have a professional deal with the taxes of the trust (if applicable), the company and your personal tax. That professional should be a specialist in the field.
What does he have to take care of?
1) Ensuring that all relevant decisions by the trustees or major decisions by the company director are recorded as approved by the trustees.
2) Ensuring that the trust does not pay tax.
3) Advising on the best approach to additions to the trust/company’s assets.
4) Accounting for any R100 000 donations to the company in the company’s tax return.
5) Accounting for the interest on the loan account in the company and dealing with the question of whether or not it is tax deductible.
6) Accounting for the interest on loan account in the tax return of the lender.
7) Keeping up to date with changes in tax legislation and in Trust Case Law.
These functions are not included in the annual trustee’s fees as they are professional services which are rendered in a different capacity.
If you have formed a trust or are contemplating doing so, you would be well advised to visit me at no charge in order to avoid the old and new tax traps that relate to trusts.
You can make an appointment at https://harbourassociates.youcanbook.me/