Taxation of Trusts is an area that is often poorly understood. For many years, this did not negatively impact taxpayers, as taxpayers had a lot of freedom to structure trusts in such a way to obtain a tax advantage. Recently, this has become a difficult advantage to obtain without proper structuring and planning, due to the various pitfalls that are often overlooked.

Many trusts are set up via a donation made by one or more founders of the trust.  A donation can be made in one of the following ways:

  • An outright and direct donation of property to a trust;
  • The sale of property to the trust below market value; and
  • The sale of property to the trust at market value via an interest-free or low-interest rate loan.

When assessing the tax consequences related to such donations, one should consider the following tax consequences:

  • Donations tax might be due on the donation;
  • Recoupments might arise when an allowance asset is donated to a trust; and
  • Capital gains tax consequences might arise on the disposal of a capital asset to a trust.

However, over and above the tax considerations mentioned above, the risk arises of the donor being taxed on income attributed to the donation (which is actually received by beneficiaries or retained in the trust).  Section 7 of the Income Tax Act contains anti-avoidance provisions that are applicable when a “donation, settlement or other disposition” is present.  A “donation, settlement or other disposition” basically implies that a gratuitous disposal took place.  If income is attributed to a gratuitous disposal, the donor might be taxed on the income in the following circumstan


Reference to section 7

Transactions between spouses


Donation, settlement or other disposition by a parent and income is received by or accrues to minor children

7(3) and 7(4)

Donations subject to the happing of event


Donation where the donor has the power to revoke the right of a beneficiary


Cessation of income


Resident making a donation, settlement or other disposition that benefits a non-resident













The donor might not be aware of the risk of attribution of income in terms of section 7 and, although the donor doesn’t actually receive the income, the donor might be taxed thereon if the requirements of section 7 have been met.  This catches many donors off guard and results in unexpected cash outflow from the donor’s perspective.  It should be noted that the donor might be able to negotiate for reimbursement of such taxes paid from the beneficiaries who have actually received the income or from the trust if the income is retained, but no obligation for such reimbursement exists and the beneficiaries and trust can refuse.

The question that arises is whether providing an interest-free loan or a low-interest rate loan constitutes a “donation, settlement or other disposition”.  The following important court cases must be considered:

C:SARS v Brummeria Renaissance (Pty) Ltd and Others

The court determined that there is a value attached to making use of financing without needing to pay for it.

C:SARS v Woulidge

The court determined that an interest-free or low-interest rate loan provided constitutes a continuous donation for purposes of section 7. 

The abovementioned two cases determine that providing interest-free or low-interest rate financing constitutes a “donation, settlement or other disposition” and the attribution rules contained in section 7 must, therefore, be considered.  The value attached to this type of donation is equal to the interest saving, i.e. the difference between the interest that would have been levied (had the transaction been market-related) and the interest that was actually levied.

But, unfortunately, the tax burden for the donor doesn’t end here.  Section 7C of the Income Tax Act was introduced and became effective on 1 March 2017.  When a loan, credit or advance is made available to a trust (or to a connected person of a trust), section 7C will be applicable if:

  • The interest charged on the loan is below the official interest rate (which is 4.5% from 1 August 2020) or no interest is charged; and
  • A connected person of the trust makes the loan, credit or advance available.

If the abovementioned requirements are met, section 7C deems that a continuous donation arises from the perspective of the party making the financing available, the value of which is the interest saving (i.e. the difference between interest that would have been levied based on the official interest rate and the actual interest charged on the financing).  The donation is deemed to become effective on 28 February / 29 February and donations tax is consequently payable on 31 March.

Consider the following example:

Mr. Donor sold a rent-producing property to a trust of which one of his children is a beneficiary.  The sale occurred on 1 July 2019 and was financed via an interest-free loan provided by Mr. Donor.  The property was sold at R2 000 000 (which also represents its market value at the time). The trust repaid R100 000 of the capital on the loan to Mr. Donor on 1 January 2020.  Assume that the official interest rate was as follows:

From 01.12.2018 until 31.07.2019


From 01.08.2019 until 31.01.2020


From 01.02.2020 until 31.03.2020



The donor also donated a cash amount of R50 000 to the trust during the 2020 year of assessment.

The calculation of the deemed donation in terms of section 7C will be done as follows for the 2020 year of assessment:


Outstanding balance of the loan

Official interest rate


1 July 2019 – 31 July 2019

R2 000 000


R2 000 000 x 7.75% x 31/366 = R13 128

1 August 2019 – 31 December 2019

R2 000 000


R2 000 000 x 7.5% x 153/366 = R62 705

1 January 2020 – 31 January 2020

R1 900 000


R1 900 000 x 7.5% x 31/366 = R12 070

1 February 2020 – 29 February 2020

R1 900 000


R1 900 000 x 7.25% x 29/366 = R10 915


Therefore, the total value subject to the provisions of section 7C will be R98 818.  This amount will be added to other donations as follows:

Donation of cash                                                                                                                   R50 000

Deemed continuous donation in terms of section 7C                                                           R98 818

Total donations                                                                                                                    R148 818

Less: Section 56 general exemption available to natural persons                                     (R100 000)

Taxable portion                                                                                                                      R48 818

Donations tax @ 20% = R9 764 (payable on 31 March 2020)

It is becoming increasingly important to properly structure and plan transactions with trusts, to avoid unexpected normal income tax and donations tax consequently (especially for the unsuspecting donor(s)).

For more information of how this should be done, join us for a workshop on 19 August 2020 at 09:00.

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