[FAQ] Trust property and the resulting loan account owing to the trustee

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[FAQ] Trust property and the resulting loan account owing to the trustee

• 09 December 2020
• Piet Nel

Background

A trust owns a home (land and building) which was built by the trustee for use as a primary residence in 2014. There is a trustee credit loan in the trust which is made up partly of the initial building/land of the property but also due to the running costs of the residential property which add up to around R1million per annum.

Would the portion of the loan attributable to the running costs of the primary residence be subject to section 7C?

Would the improvements made to the property be subject to section 7C?

Answer

You are reminded that SAIT's technical query system policy prescribes that only guidance should be provided in relation to requests submitted. To do otherwise would cause SAIT to compete with its own members. Guidance implies that sources or references relevant to the request are provided, but that ultimately the tax practitioner’s own professional judgment is required to be applied to the specific circumstances.

The Income Tax Act

We accept that the “trustee” who uses this “as a primary residence”, and “built the home” is in fact a person who is connected person in relation to the trust. A trustee will not necessarily be a connected person.

Based on the facts, section 7C would actually apply. We copy the relevant parts of section 7C(1) here for ease of reference:

“(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) …

For ease of reference we copied the relevant part of section 7C(5)(d) here – it reads as follows:

Sections 7C(2) and 7C(3) “do not apply in respect of any amount owing by a trust during a year of assessment in respect of a loan, advance or credit referred to in subsection (1) if … that trust used that loan, advance or credit wholly or partly for purposes of funding the acquisition of an asset and—

(i) the person referred to in subsection (1)(a) or the spouse of that person used that asset as a primary residence as contemplated in paragraph (b) of the definition of ‘primary residence’ in paragraph 44 of the Eighth Schedule throughout that year of assessment; and

(ii) the amount owed relates to the part of that loan, advance or credit that funded the acquisition of that asset …”

Application of the principles

From this it is clear that it would only apply in respect with respect and to the extent that the trust used the loan, advance or credit wholly or partly “for purposes of funding the acquisition of the asset” – the asset being the ‘primary residence’ as defined above. The taxpayer will have to prove that the building cost would be cost related to the acquisition thereof.

Webinar Commentary

Further webinar commentary on Understanding Trust Taxes 2020 can be accessed here.

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