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Amendment to section 7C: Beware of preference dividends
- 19 November 2020
- Tax implications of loans to trusts
- Karen van Wyk
Back in the “good old days”, one didn’t need to worry about interest-free or low interest rate loans provided to trusts. But with the introduction of section 7C, the interest saving arising on these loans is deemed a continuous donation and subject to donations tax. Although we didn’t like this amendment, we’ve had to make peace with it.
Now, a further amendment to section 7C has been tabled, which is bound to increase the reach of section 7C. The scope of the current version of section 7C is focused on a “loan, advance or credit granted to a trust by a connected person”. The tabled amendment introduces the new section 7C(1B) which widens the scope of section 7C to also be applicable when a trust holds 20% or more of the equity in a company (therefore, making the company a connected person of the trust) and this connected person company issues preference shares to the trust.
The amendment comes into operation on 1 January 2021 and is applicable to any local or foreign dividend accruing during any year of assessment commencing on/after this date.
Webinar Commentary
For more information on the impact of this and other amendments, watch our annual Tax Update workshop presented by Prof Jackie Arendse here.