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Section 7C Loans To Trusts
- 02 May 2024
- Accounting
- The Tax Faculty Tax Specialist
These articles are based on tax law for the year ending 28 February 2025.
1. Background Information
Trust XYZ purchased a primary residence from Trustee A on a loan. Trustee B, who is married to Trustee A, also sold his residential property to Trust XYZ, and the trust owes him the purchase price of the property. No rental income is received by the trust for any of the properties. Trustee A and B use the property sold by Trustee A to the trust as their primary residence and live from time to time in the property sold by Trustee B to the trust. It is assumed that no interest is charged on the loans between Trust XYZ and Trustee A and Trustee B respectively.
2. The Problem / Facts
- Is section 7C applicable to the loan between Trust XYZ and Trustee A?
- Is section 7C applicable to the loan between Trust XYZ and Trustee B?
3. Applicable Law
Income Tax Act No. 58 of 1962, section 7C
4. Application of the Law to the Facts
Section 7C is an anti-avoidance provision designed to address a situation where a loan is made to a qualifying borrower interest-free or at a rate lower than the official rate of interest as defined in paragraph 1 of the Seventh Schedule to the Act (Official Interest Rate). An amount, calculated as the difference between the interest charged on the loan (if any) and the interest that would have been incurred had the official rate of interest been charged on the loan, will be treated as a donation. This donation is deemed to be made to the trust by that natural person on the last day of his/her year of assessment.
The exception arises if the trust used the proceeds from the loan to acquire a primary residence used by the lender or his spouse.
Based on the information provided, it seems that the loan from Trustee A to Trust XYZ for purchasing a primary residential property used by Trustee A, falls within the exception. Therefore, section 7C does not apply to this loan.
However, the loan from Trustee B to Trust XYZ for the purchase of Trustee B’s residential property does not qualify for the exception, as Trustee B does not use the property as a primary residence. Trustee A and Trustee B are married (generally married persons live together in a property). Therefore Trustee A and Trustee B use the property purchased by the trust from Trustee A as their primary residence. As a result, it is clear that the property purchased by the trust from Trustee B is not used as a primary residence by Trustee A or Trustee B. Therefore, section 7C is applicable to the loan between Trust XYZ and Trustee B. Trustee B may have to pay donations tax on the deemed donation arising from the low-interest or interest-free loan.