New laws relating to loans to trusts
The Taxation Laws Amendment Act of 2016 is now a reality. Loans to trusts below the offical interest rate come under the spotlight, but don’t panic!
As I advised when reviewing the Bill, the provision applies to loans to a trust by any person or company connected to that person free of interest or at an interest rate below the official rate (which is the repo rate plus 1%). The essential point is that the provisions apply to loans made directly or indirectly to trusts but I took specialist advice and was informed that the word indirectly does not apply to loans to companies which are owned by trusts. The new amendments deem the shortfall in interest as being a donation – not a big deal as all individuals are allowed to make up to a total of R100K per annum donations free of Donations Tax, but note that companies making donations (in this case low interest loans) do not enjoy the same exemption.
Note also that donations are tax free capital receipts by the recipient of the donation, so the trust and it’s company will not be subject to additional tax as a result of these amendments
The provision does not apply to loans made in order for the trust to acquire the primary residence of the lender or his/her spouse, provided that they are not beneficiaries of the trust (not much use to anybody).
So, if this amendment hits you, what are your options?
1) Charge interest at the official rate. This is a simple book entry – Debit Interest paid Credit Loan account and the interest then becomes tax deductible in the hands of the trust and will be taxable in your hands (less the annual interest exemption if you have not already used it elsewhere).
2) If one of your companies made the loan, then best is for it to charge interest as the interest will be taxable in the hands of the lender and tax deductible in the hands of the borrower. This is actually beneficial if the loan was directly to the trust as the trust gets a tax deduction at 45% whilst the lending company only pays 28% tax on the interest income. If the loan was made to a company owned by the trust, then it is tax neutral (28% on both sides).
Another brilliant piece of legislation which will benefit the fiscus about zero!
If you would like a more in depth discussion about your trust I would welcome you at our offices. You can book a no-charge meeting here