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US ARTICLE
Interest-free
loans to trusts
THIS FAIRLY DRAMATIC CHANGE IMPACTS ON INTEREST-FREE LOANS TO TRUSTS,
AS WELL AS THOSE LOANS THAT ATTRACT INTEREST, BUT AT A RATE LOWER
THAN THE OFFICIAL INTEREST RATE.
LUCAS COETSEE
LIBERTY LEGAL SPECIALIST
T
he difference between the official rate
and the actual rate of interest charged
is be deemed to be a donation in the hands of
the person who made the loan as from 1 March
2017.
For example:
Mr X transfers assets worth R20 000 000 to
his discretionary trust, on loan account. The
official rate of interest is 8% per annum. Mr
X does not charge the trust any interest on the
loan.
R20 000 000 x 8% = R1 600 000 is the inter-
est that should have been charged, but was not.
Mr X is deemed to have donated the R1 600
000 to the trust. The current rate of donations
tax is 20%.
Assuming no other donations are made by Mr
X:
R1 600 000 - R1 00 000 (annual tax free
donation) = R1 500 000 x20% = R300 000 in
donations tax to be paid by Mr X to SARS.
As long as the loan account remains on the
books of the trust, this calculation will be done
each and every year, applying the relevant val-
36
APRIL/MAY 2017 • SENWES Scenario
ues at that point in time. It does not matter
when the loan was made, donations tax will
apply to all outstanding loans as from 1 March
2017.This amendment will impact on many
high net-worth clients who have transferred
assets or cash to trusts on loan account.
They may wish to review their trust struc-
tures to now charge interest, or to make pro-
vision to ensure they have the cash to pay the
donations tax. They may even consider winding
up their trusts. Very important here is to go
back to basic principles.
If the trust was established to protect and
create wealth for future generations, then, while
no one is going to be happy to pay more tax,
it will be accepted that this is the price you pay
to meet your ultimate needs. If the only reason
for the establishment of the trust was to save on
tax, the bitterness at the tax burden will be all
the greater.
It is important to remember that the new
provisions do not apply to all trusts and all
loans. Specific types of trusts (e.g. trusts set
up as public benefit organisations and vesting
trusts) will be excluded and loans made in rela-
tion to primary residences will be exempt.