A family trust wants to provide a beneficiary with an interest-free loan, repayable in 20 years. Would there be any tax consequences / implications of entering into this transaction? e.g. deemed donation / dividend?
Important:
This answer is based on tax law for the year ending 28 February 2020.
Answer:
From a tax point of view we accept that the trustees will be acting within their mandate (as provided for in the trust deed) in granting the loans. As such, 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 accept that there is a bona fide intention to make a loan and the beneficiaries intend repaying the loan. The loan will also be made from funds in the trust, in other words no interest incurred on funds borrowed.
We accept that this will be made to them in their capacity as beneficiaries, in other words not in respect of services rendered.