Section 7C Interest Calculation on Loan – Full Year or Rental Period?

Section 7C Interest Calculation on Loan – Full Year or Rental Period?

• 28 February 2025
• Trusts
• The Tax Faculty Tax Specialist

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

Question:

A connected person bought a primary residence by way of loan account through a trust. there were no S7c implications on the loan due at the time. The connected person then rented out the property for 4 months of the financial year (Nov - Feb). This trigger S7c implications on the loan. Question - should the interest on the loan be calculated for the whole year or only from the time that the primary residence was rented out, i.e. from Nov onwards

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 Section 7C 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 hinges 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, thereby triggering interest calculations.
• 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 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 the specific period during which the loan does not qualify as exempt (i.e., November–February).
  • Ongoing Obligations: Going forward, interest on the loan should continue to be calculated based on the period during which the property generates rental income unless it reverts to exclusive primary residence use or the loan terms are amended.

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