South Africa: Proposal to address tax avoidance on wealth transfers to certain trusts by individuals

Proposal intended to enhance anti-avoidance rule with regard to wealth transfers by individuals

Proposal to enhance anti-avoidance rule with regard to wealth transfers by individuals

The 2021 Draft Taxation Laws Amendment Bill (released 28 July 2021) includes a proposed amendment to section 7C of the Income Tax Act, No 58 of 1962 that is intended to enhance the anti-avoidance rule with regard to wealth transfers by individuals making low-interest or interest-free loans, credits or advances to certain connected-person trusts.

Background

Section 7C was introduced in 2016 as a mechanism aimed at curbing the transfer of wealth by an individual to a connected person trust by way of low-interest and interest-free loans, credit or advances. These arrangements were viewed as providing an estate planning benefit, primarily driven to manage the donations tax and estate duty liability for the individual. Section 7C created an annual donations tax liability for the individual transferring the wealth. The current provisions cover a low-interest or interest-free loan, credit or advance directly or indirectly via a company or via certain preference share structures, to the connected person trust or company held by such trust. Critical to this provision is that there must be a connected person link between the individual, the trust and company (where applicable).

Subsequent to the introduction of section 7C, taxpayers continued devising schemes that assisted them to avoid section 7C.

The National Treasury has become aware of further schemes when the base cost of high-value off-shore trust assets are being increased with no corresponding taxing event in South Africa. 

Proposed amendment

The proposed amendment would determine that the anti-avoidance measures would apply with respect of any loan, credit or advance that a trust provides, whether directly or indirectly, to another trust wherein the founder and beneficiaries of both trusts are connected persons.

Read an August 2021 report [PDF 198 KB] prepared by the KPMG member firm in South Africa

 

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