Please advise on whether the below statements are correct: if the loan is at 0% interest in the trust records, would section 7C apply and therefore deemed interest would need to be declared as interest income in the individual’s tax return (on which the
Important:
This answer is based on tax law for the year ending 28 February 2020.
Answer:
Section 7C would only apply if the person who made the loan to the trust is a connected person in relation to the trust and then if the trust “incurs … no interest in respect of a loan” – the 0% in your facts.
Section 7C, as was alluded to in the previous response, doesn’t result in the person (the one who made the loan) being deemed to have received interest. As there is no interest there is also no exemption – the section 10(1)(i) exemption – from normal tax to consider. Section 7C results in the difference between the official rate of interest and the interest incurred (0 in your case) being “treated as a donation made to that trust by the person … on the last day of that year of assessment of that trust.” The amount of this deemed donation (treated as) is added to the other donations made by the individual during the year of assessment and, to the extent it exceeds R100 000, it is subject to donations tax at 20%.
If the agreement between the individual and the trust, with regard to the loan, required the trust to incur interest, there would be an accrual to the individual (section 24J), it would be added to other interest accruals and the section 10(1)(i) exemption from normal tax would be available.
l indicated that, for it to be a loan there must be an agreement in place between the trustees and the beneficiaries (in this instance) – this doesn’t seem to apply where the amounts were merely vested and not paid out subsequently. It is my view that the mere accounting treatment of the event as a loan, doesn’t make it a loan.
There was no advance given either – the “amounts were vested”, but it was not “paid out to the beneficiaries”.
The issue then is whether it is a credit. It is commonly accepted that a “credit” also refers to an accounting entry. On the basis of that interpretation the amount may well be a credit for purposes of section 7C.
The beneficiaries, in turn then didn’t provide (as in advance (or lend)) money to the trust. In a sense, the trustees then vested the ‘income’ or ‘capital gain’ but didn’t pay the amount vested amounts to the beneficiaries. The position would be different if the beneficiaries allow the trustees to use the amounts (money). It is submitted that it may then well indicate that the amounts were provided by the beneficiaries because the trust (trustees) can use it. So, it would strengthen the argument that no loan was provided if the amounts were kept separately from the other assets or investments of the trust. The moment they are used by the trust and the ‘income’ derived from that use is under the discretion of the beneficiaries, they may well have provided and section 7C will apply.