A discretionary trust made interest free loans to their beneficiaries without loan agreements. The trust deed however specify that interest free loans can be made to the beneficiaries. What will SARS's opinion be regarding the interest free loans and the
Important:
This answer is based on tax law for the year ending
Answer:
We are not sure what guidance from a tax point of view is required here. It may well be that legal advice is required.
From a tax point of view we accept that the trustees were acting within their mandate in granting the loans. As such we agree that the granting of the benefit to the beneficiaries of not having to pay interest will not constitute a donation. In this regard see for instance the decision in the Abraham Krok Trust v SARS. We accept that the minutes of the meeting where the trustees approved the making of the loan and its conditions may well be acceptable, in other words, that no agreement between the parties is necessary.
We also don’t see that a tax benefit arises, as the tax in the trust is paid at 40%.
Whilst not a tax related issue we agree that the parties may have a problem proving that the intention was actually that the trust makes a loan which the beneficiary intends to pay back, albeit when income is subsequently vested. It may for instance happen that the beneficiary is in no position to pay back the loan, particularly where the loan is used for living expenses. In such an instance the intention may be queried by SARS and they can treat it as a vesting event.