The recent Tax Law Amendment Bill included amongst others, changes to the taxation of zero interest and / or low interest loans to trusts, which will come into effect on 1 March 2017. Zero interest loans and / or loans at a rate of less than current legislated rate of 8% will be treated as continuous donations to the trust, liable for donations tax on the notional interest forgone.
To illustrate; assuming a zero-interest loan of R 2 million the notional interest forgone at the legislated rate of 8% is R 160 000, which is then deemed to be a donation to the trust. Fortunately, the annual individual donation exemption of R 100 000 can be offset against this amount resulting in a donation tax liability of R 12 000 (R 160 000 less R 100 000 exemption = R 60 000 X 20% donations tax).
If you have made a zero-interest loan to a trust of R 1250 000 or lower, then the before mentioned changes will not affect your cashflow as you can offset the annual donation exemption against the deemed interest donation. Of-course in previous years you would have used the annual donation exemption to reduce the loan account, which will then no longer be possible or will need to be reduced proportionately.
The above is an improvement on the 1st draft bill, which had proposed taxing the deemed interest as income, which would have been punitive for anyone on a tax rate higher than 20%.
Although beyond the scope of this article there are several significant changes proposed for the taxation of trusts covered in the Davis Tax Committee’s 2nd interim report on estate duty, which trustees need to keep an eye on.
We eagerly await the budget speech in February for any further information on the Davis Tax Committee proposals. Suffice to say don’t rush to unwind current estate planning, lets rather wait and see what transpires, but most importantly, estate plans need to be flexible and reviewed regularly.
Mcomm, CFP®, HdipTax
T. 021-851 3746