National Treasury and the South African Revenue Service (SARS) recently published the second draft of the 2016 Draft Taxation Laws Amendment Bill (TLAB) for public comment.

The initial proposals have been considerably toned down in the second draft of TLAB.

A reminder of the initial proposals in the first draft of TLAB (July 2016):

  • In the case of interest-free loan to a trust, the lender would be deemed to have received interest at the official interest rate, and this interest would be included in his taxable income.
  • In the case of a low-interest loan, the difference between the interest charged and the official interest rate (currently 8%) would be added to the lender’s taxable income.
  • The R100 000 annual donations tax exemption would no longer apply.

These are the latest revised second draft proposals (September 2016):

With effect from 1 March 2017:

  • The deemed interest on interest-free and low interest loans will be treated as an on-going annual donation.
  • The R100 000 annual donations tax exemption may still be used, provided that the deemed interest on the remaining loan is included.

Public comments on the initial TLAB proposals emphasised the fact that interest-free or low interest loans to trusts are not only used to avoid estate duty, but also provide an important vehicle for many other objectives such as: to protect assets, to provide maintenance for disabled children, as employee incentive trusts and for public benefit organisations (PBOs).  Treasury agreed with this and said it would narrow the scope of the proposed amendment and that it will specifically exclude, among others, loans to:

  • Special trusts (established solely for the benefit of minors with disability)
  • Trusts that are legally defined as public benefit organisations (PBOs)
  • Vesting trusts (where the vesting rights and contributions of the beneficiaries are clearly established)
  • Loan used by a trust to fund the acquisition of the lender’s primary residence
  • Loans that constitute affected transactions and that are subject to transfer pricing provisions
  • Loans to a trust in terms of a Sharia-complaint financing arrangement

The Treasury has clarified that the draft proposals will to apply to all loans to trusts, including those in existence before 1 March 2017.