Are there any donations tax implications with an interest free loan?
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
Judge Froneman in CSARS v RM Woulidge said, “as long as the capital remains unpaid the failure to charge interest represents a continuing donation…” The court case dealt with section 7 of the Income Tax Act. We accept that the daughter is not a minor.
With regard to loans to children (not minors) it is generally accepted that the interest free loan doesn’t actually result in a donation for donations tax purposes. The question is whether the interest not charged, constitutes a donation – the ‘failure to’ as the Judged said.
SARS recently caused the Income Tax Act to be changed and has introduced section 7C into the Act. It deems a donation to arise when an interest free loan is made to a trust by a person connected to the trust (under certain circumstances).
The parties, if they don’t view this as a donation (not property or the waiver of a right), will have to prove that it was not a donation as defined in section 55(1) of the Act or, if it was, that section 56(2)(c) applies.