Clarification on Section 64E(4) and Credit Loan Accounts

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Clarification on Section 64E(4) and Credit Loan Accounts

• 28 January 2025
• Corporate Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 29 February 2025.

Questions:

Section 64E(4) of the Income Tax Act states that a loan provided to an individual shareholder (who is not a company) will be deemed a dividend and subject to dividend tax. The value of the dividend is calculated as the interest that would have been charged at prime less 2.5%, minus any interest actually charged.

Does this also apply to credit loan accounts?

For instance, if a shareholder has a credit loan account and opts to charge the company only 6.5% interest, the following questions arise:

1. Can the "difference" be regarded as a donation from the shareholder to the company, and would the R100 000 annual donations tax exemption then apply?

2. Should the shareholder declare only the actual interest received in their tax return, or should they also include the portion that was "donated"?

3. Is Section 64E(4) the correct provision to apply in this case, or should another section of the Income Tax Act be referenced instead?

Answers:

1. The Problem / Facts

A shareholder has provided a loan to the company at an interest rate of 6.5%, which is below the benchmark rate (prime less 2.5%).

• Question 1: Can the "difference" be regarded as a donation from the shareholder to the company, and will the R100,000 exclusion for donations tax then apply?
• Question 2: Should the shareholder declare only the actual interest received in their tax return, or should they include the portion effectively "donated"?
• Question 3: Is Section 64E(4) the correct provision to apply, or should another section of the Income Tax Act be used?

2. Applicable Law

• Deemed Dividends: Income Tax Act – Section 64E(4)
• Donations Tax: Income Tax Act – Section 56(2)(b)
• Interest Declaration: Income Tax Act – Section 24J
• Annual Donations Tax Exemption: Income Tax Act – Section 56(2)(b)

3. Application of the Law to the Facts

• Question 1: Can the "difference" be regarded as a donation, and will the R100,000 exclusion for donations tax be applicable?
  • The difference between the official rate (prime plus 1) and the 6.5% interest rate charged may be considered a donation from the shareholder to the company. Donations tax could apply to this amount, but the shareholder may utilise the annual R100,000 exemption under Section 56(2)(b) of the Income Tax Act to offset potential liability.
• Question 2: Should the shareholder declare only the actual interest received in their tax return, or should they include the "donated" portion?
  • The shareholder will declare only the actual interest received (6.5% of the loan amount) as taxable income. The "donated" portion is not regarded as interest income for their personal tax return but may have donations tax implications.
• Question 3: Is Section 64E(4) the correct provision to use, or should another section of the Income Tax Act apply?
  • The donations tax provisions under Section 56(2)(b) are relevant in determining whether the interest differential qualifies as a donation.

 

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