The recent Tax Law Amendment Bill included, among others, changes to the taxation of zero interest and/or low interest loans to trusts, which will come into effect on Wednesday 1 March.
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 R2 million, the notional interest forgone at the legislated rate of 8% is R160 000, which is then deemed to be a donation to the trust. Fortunately, the annual individual donation exemption of R100 000 can be offset against this amount resulting in a donation tax liability of R12 000 (R160 000 less R 100 000 exemption = R60 000 x 20% donations tax).
If you have made a zero-interest loan to a trust of R1 250 000 or lower, then the before mentioned changes will not affect your cash flow 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 first 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 second interim report on estate duty, which trustees need to keep an eye on.
We eagerly await the budget speech this month for any further information on the Davis Tax Committee proposals. Suffice to say: don’t rush to unwind current estate planning; let’s rather wait and see what transpires, but most importantly, estate plans need to be flexible and reviewed regularly.
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