What are the tax implications on an interest free loan between family members. For Example: Father make a R 2,000,000 loan to his son - interest free?
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 son 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 will, 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.
On the assumption that section 31 one the Income Tax Act doesn’t apply, we agree with you that the Act doesn’t deal with this. This of course accepts that there is not a tax benefit – see the impermissible avoidance sections.