1 March 2017: New legislation will prevent (perceived) tax avoidance using trusts
The 2016 Taxation Laws Amendment Act (TLAA) will come into effect on 1 March 2017, the revised draft of the Taxation Laws Amendment Bill (‘TLAB’) in October. The final version of the TLAB was published in December 2016, promulgated on 19 January 2017, and will come into effect on 1 March 2017.
The final TLAA contains a few minor clarifying changes to section 7C
- 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 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 section 7C 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.
- 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.
- The Explanatory Memorandum that accompanied the TLAB provides that an amount that is vested irrevocably by a trustee in a trust beneficiary and that is used or administered for the benefit of that beneficiary, without distributing or paying it to the 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, for example, a certain age; or
- provides that the trustee has the sole discretion to determine the time and extent of any distribution to that beneficiary of such vested amount.
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 do not pay over the income and/or capital to the beneficiary until they decide to do so. Section 7C will however apply when a trust vests an amount in a trust beneficiary and the beneficiary elects or requests that the amount not be paid over to them.
Please read the documents for more detail:
- Each trust needs to be assessed independently to determine the best way forward. Each trust must be considered on a case-by-case basis to decide the most tax-efficient way forward. Please refer to our previous communication for more details on this.
- We are here to provide you with the specialist support and advice you may need. Your client relationship manager and regional fiduciary specialist are available to address any questions or concerns you may have about your circumstances. If you haven’t already had a discussion with them, we encourage you to do so.
- We are considering the practical implications. The trustees are responsible for recording loans owing to third parties. For trusts where we are appointed as corporate trustee, we are considering the best way to deal with all the practical implications.
- As the donation will be the amount incurred during a year of assessment, it is essential that as trustee, we have accurate records of the loan account movements during the year.
- We will review the trust deeds to determine whether they give trustees the power to make distributions without paying them out, and the discretion to determine when payment is made. Where possible, we need to amend trust deeds that do not include this power.
- The format of annual financial statements should ensure that future distributions that are not paid out are reflected correctly as such, rather than as amounts owing on a loan account.