Loan to a Trust From a Company Where the Trust is the Sole Shareholder

Loan to a Trust From a Company Where the Trust is the Sole Shareholder

• 12 December 2024
• Accounting
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2025.

1. The Problem / Facts

Company A is fully owned by Trust E, which is a family trust.

• Company A gives an interest-free loan to Trust E.
• The only director of Company A is also a beneficiary of Trust E.

Since the company is entirely owned by the trust, does it still have to pay tax on the deemed dividend arising from the interest-free loan?

2. Applicable Law 

ITA 58 of 1962 Section 7C

3. Application of the Law to the Facts

When a company makes an interest-free loan to a trust, and the director of the company is a connected person to the trust, specific anti-avoidance measures under Section 7C apply.

1. Anti-Avoidance Measures:

• The anti-avoidance provisions under Section 7C took effect on 1 March 2017. These measures aim to curb tax avoidance schemes involving interest-free or low-interest loans to trusts.
• These rules apply to both new loans and existing loans as of the effective date.

2. Connected Person Definition:

• For the purposes of these rules, a "connected person" includes individuals and entities linked to the trust. In this case, since the director of the company is a beneficiary of the family trust, they are considered a connected person.

3. Deemed Donation:

• When an interest-free or low-interest loan is made by a company to a trust, and the company is connected to the trust, the interest foregone is deemed to be a donation by the connected person.
• The deemed donation is calculated as the difference between the interest charged n (if any) and the interest that would have been charged at the official rate.

4. Donations Tax:

• The deemed donation is subject to donations tax at a rate of 20%.
• This annual tax liability falls on the connected person (e.g., the director) even though the loan is advanced by the company.

5. Annual Assessment:

• Each year, the deemed donation made is calculated and subjected to donations tax in the trust’s annual assessment.

0 COMMENTS

LEAVE A COMMENT