South Africa: Documentation for interest-free or low-interest loans involving trusts

Uncertainty as to the transactions that may be caught within the ambit of section 7C

Uncertainty as to the transactions that may be caught within the ambit of section 7C

There has been a focus on tax planning around trusts, in particular with the 2016 introduction of section 7C of the Income Tax Act, No 58 of 1962. Specifically, those with responsibility over family trusts and companies need to confirm there is appropriate documentation to avoid unnecessary risks with respect to intra-family commercial loans.

There could be some uncertainty as to the transactions that may be caught within the ambit of section 7C—specifically loans between companies that form part of a group of family businesses and are ultimately owned by a family trust(s).

In 2019, this uncertainty was heightened with the extension of the provisions of section 7C to include an interest-free or low-interest loan made by, or at the instance of, an individual to a company when the individual holds at least 20% of the equity shares or exercises voting rights in that company.

The purpose of section 7C is to address the avoidance of donations tax and estate duty by taxpayers transferring assets into a trust on either an interest-free or low-interest loan account. While there may be instances when section 7C could justifiably be triggered, there are other instances when there is a true commercial or business intention to the intra-family enterprise financing.

As the burden of proof rests on the taxpayer to justify the true intention of the transaction, company or trust documentation (including company or trust resolutions, minutes of meetings, etc.) is crucial. These must clearly indicate what the purpose of the interest-free or low-interest intra-family enterprise loan is, and must clearly indicate at whose instance, and in what capacity, the loan is provided, in order to mitigate the risk of the loan falling within the ambit of section 7C. Considering the purpose of section 7C of the Act, the documentation must justify in form and substance that the purpose of the loan was not for estate planning purposes.

Read a May 2021 report [PDF 349 KB] prepared by the KPMG member firm in South Africa


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