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.