1. Will section 7C also be applicable to the credit loans that Mr A and Mr B have in the company due to the following: This provision, which has been promulgated into the Income Tax Act as section 7C, applies to any loan, advance or credit made directly
Important:
This answer is based on tax law for the tax year ending 28 February 2018.
Answer:
The draft Taxation Laws Amendment Bill, contains a proposal to amend section 7C of the Income Tax Act, as follows:
(a) by the substitution for subsection (1) of the following subsections:
“(1) This section applies in respect of any loan, advance or credit that—
(a) a natural person; or
(b) at the instance of that person, a company in relation to which that person is a connected person in terms of paragraph (d)(iv) of the definition of connected person,
directly or indirectly provides to—
(i) a trust in relation to which—
(aa) that person or company, or
(bb) any person that is a connected person in relation to the person or company referred to in item (aa),
is a connected person; or
(ii) a company that is a connected person in relation to the trust referred to in subparagraph (i).”
The draft Explanatory Memorandum explains it as follows:
“In order to avoid the application of the anti-avoidance measure, taxpayers advance interest free or low interest loans to companies whose shares are held by trusts. By advancing the loan to the company rather than the trust, the anti-avoidance measure will not apply as it currently only applies to loans advanced to trusts. As such, the fiscus will forgo the ongoing and annual donations tax on the deemed donation. These companies benefit from this low or no interest funding and tax can only be collected at a much later stage when the company makes distributions to the trust.”
The service offered by us is limited to guidance. Guidance implies that sources or references relevant to your request are provided, but that ultimately your professional judgment is required to be applied to the specific circumstances.
You seem to accept that section 7C applies in respect of the loans made by the two persons, as beneficiaries, to the trust. We agree with that.
The company is a connected person in relation to the trust so the new provision may find application.
The donations between spouses don’t have an impact on the section 56(2)(b) amount. We accept that the donation wasn’t done to benefit from the section 56(2)(b) amount available to the other spouse – presumption of purpose section 80G. As the R100 000 is a cumulative amount for the year, and the section 7C donation takes effect on the last day of the year, it is reduced by previous donations. Section 7C doesn’t deal with the R100 000.