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Regulatory Development – TLAB

To refresh your memory, please read FISA’s article on the revised draft of the TLAB in our October 2016 newsletter. The final version of the Bill was published in December 2016 and assented to in January 2017. It has not yet been promulgated, but there seems to be no reason why this will not be done prior to 1 March 2017, when the proposed section 7C comes into operation.

Some changes have been made to the draft version of section 7C, which changes provide clarity to some key issues:The donation will be deemed to have been made on the last day of the year of assessment.

  • The donation will be deemed to have been made on the last day of the year of assessment.
  • The deemed donation is an amount equal to the difference between the interest of interest incurred by the trust during a year of assessment and the amount of interest that would have been incurred by the trust had the official rate of interest been charged. The emphasised words indicate that the section will apply when there has been a loan at any stage during a year of assessment, regardless of whether the balance of the loan at the end of the tax year is nil.
  • We indicated previously that there was some uncertainty around whether the provisions will apply where the trustees, in terms of the discretionary powers given to them in the trust deed, credit distributions to a beneficiary on loan account on behalf of such beneficiary. The Explanatory Memorandum that accompanies the Bill clarifies that an amount that is vested irrevocably by a trustee in a trust beneficiary without distributing or paying it to the beneficiary, and that is used or administered for the benefit of that beneficiary, will not qualify as a loan or credit provided by the beneficiary, provided the trust deed prohibits the trustees from distributing the amount to the beneficiary before (eg) a certain age, or provides that the trustee has the sole discretion to determine the time and extent of any distribution of such vested amount to that beneficiary. This means that section 7C will not apply where trustees distribute income and/or capital to a beneficiary in terms of the powers granted to them in the trust deed and only pay over the income and/or capital to the beneficiary when they decide to do so. Where the beneficiary requests that the amount not be paid over to him, the section will however apply.
  • Small business funding entities approved by the Commissioner in terms of section 30C of the Income Tax Act are now included in the list of exemptions.

We urge you to discuss these changes with your clients. Each trust has to be considered on its own merits to determine how to address loans owing to connected persons in the most tax efficient way, both for the trust and the individual concerned.

We also advise that you review trust deeds to determine whether the deed gives the trustees the power to distribute income and/or capital to beneficiaries without paying it to them and the discretion to determine when such payment is made. Where possible, trust deeds that do not include this power need to be amended. Going forward, it is also important that the annual financial statements of the trust correctly reflect distributions that are not paid out as such rather than as amounts owing on loan account.

4 thoughts on “Regulatory Development – TLAB

  1. The summary above reads:

    This means that section 7C will not apply where trustees distribute income and/or capital to a beneficiary in terms of the powers granted to them in the trust deed and only pay over the income and/or capital to the beneficiary when they decide to do so. Where the beneficiary requests that the amount not be paid over to him, the section will however apply.

    I suggest it should read:

    This means that section 7C will not apply where trustees VEST income and/or capital OR AN AMOUNT to a beneficiary in terms of the powers granted to them in the trust deed and only DISTRIBUTE OR pay over the SO VESTED value to the beneficiary when they SO DECIDE OR ARE ALLOWES TO, TAKING INTO ACCOUNT THE TRUSR DEED. Where the beneficiary requests that the amount not be paid over to him, the section will however apply. WHERE A LOAN AGREEMENT, WRITTEN OR VERBALLY, IS ENTERED INTO, SECTION 7C WILL APPLY. WHERE THE AFS NOTE READS: THE LOAN HAS NO FIXED TERM OF REPAYMENT MERELY STATES NO INTEREST ACCRUES, SECTION 7C APPLIES AS BOTH PARTIES AGREED TO THE TERMS AND CONDITIONS OF THE LOAN.

  2. The summary above, highligting the changes, also fails to clearly state that the foregone interest is no longer to be included in taxable income of the natural person.

    Many FISA members are using this update and then follow the link to the article of October and left thinking the income attribution remains intact.

    Not so!

    The above article reads:

    Some changes have been made to the draft version of section 7C, which changes provide clarity to some key issues:The donation will be deemed to have been made on the last day of the year of assessment.

    The donation will be deemed to have been made on the last day of the year of assessment.

    Perhaps it should have read:

    Some changes have been made to the draft version of section 7C, which changes provide clarity to some key issues:The difference in interest incurred and the interest calculated at the official rate of interest, will NO LONGER be included in the income of the NATURAL person
    (NOTE: even the original article was INCORRECT in stating ” interest will be included in the income of the person making the loan.” It has always been in the name of the natural person not the company, advancing the loan to the trust. Even the donation tax is payable by the natural person in ration to his shareholding).
    * The donation will be deemed to have been made on the last day of the year of assessment.

  3. Thank you for your comments.
    The article published in October makes it clear that in terms of TLAB2 the non-charged interest will be treated as a donation and no longer as income (as suggested in DTLAB). We therefore do not believe that this is confusing.
    Your comment about the incorrectness of the original article is not clear. The preamble to the article clearly positioned that section 7C applies to a natural person making a loan to a trust. The reference thereafter to the interest being including in the income of the person is therefore intended to refer to a natural person.

  4. Thank you for your comments. We confirm that it is noted as amplification of what is already stated in the article.

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