A mother lends R 5 million interest-free to her adult child so that he can invest the funds offshore. What would the consequences be of the loan being interest free?
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
Your last sentence, under your own view, relates to section 80G(1) of the Income Tax Act. In terms thereof, an “avoidance arrangement is presumed to have been entered into or carried out for the sole or main purpose of obtaining a tax benefit unless and until the party obtaining a tax benefit proves that, reasonably considered in light of the relevant facts and circumstances, obtaining a tax benefit was not the sole or main purpose of the avoidance arrangement.”
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.
You have stated that the child 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), but doesn’t apply in this instance. On the facts provided, section 7 doesn’t apply. The Act doesn’t actually deal with this specific scenario, by deeming it to be a donation and prescribing how the value thereof should be determined.
The parties, if they don’t view this as a donation as defined in section 55(1) of the Act, will have to prove that it was not property or the waiver of a right. The section 56(2)(b) exemption will then apply – the R100 000.
We submit that section 31 of the Income Tax Act doesn’t apply either. There is a tax benefit – see the impermissible avoidance section referred to above, but it doesn’t arise form a transaction between a resident and a non-resident.