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S7C Implications – Loan Interest Calculation
- 26 February 2025
- Trusts
- The Tax Faculty Tax Specialist
This article is based on tax law for the year ending 29 February 2025.
Question:
Should the interest on the loan be calculated for the entire financial year or only from the period when the property was rented out (November to February), given that a connected person purchased a primary residence through a trust via a loan account with no Section 7C implications at the time, but the rental of the property for four months triggered S7C implications?
Answer:
1.The Problem / Facts
Should the interest on a loan from a connected person to a trust—used to purchase a primary residence that was later rented out (triggering S7C implications)—be calculated for the entire financial year or only from the time the property was rented out?
2.Applicable Law
-
Section 7C (S7C) of the Income Tax Act 58 of 1962: S7C applies to loans made to trusts by connected persons where no interest or low interest is charged at rates below the official interest rate. The implied benefit results in deemed donations.
3.Application of the Law to the Facts
- Based on Section 7C of the Income Tax Act 58 of 1962, the timing of S7C implications depends on the change in use of the property to a rental activity in November. At this point, the property no longer qualifies as a primary residence for S7C exemption purposes, triggering interest calculations from this date onwards.
- Legislative Interpretation:
- Interest Calculation Period: Interest on the loan should be calculated only from the time the property was rented out (November onwards) and not for the entire financial year, as the S7C implications were not applicable before the rental activity commenced.
- SARS Guidelines and Practical Calculation: S7C provisions and SARS interpretation notes suggest prorating interest calculations based on specific periods during which the loan does not qualify as exempt (e.g., November–February).
- Ongoing Obligations: In future, interest on the loan should continue to be calculated relative to the period during which the property generates rental income, unless it reverts exclusively to primary residence use or the loan terms are amended.