Save up to 40% on your child’s university fees

Tiny Carroll

The reduction in the age of majority from twenty-one to eighteen[1] brings with it a tax and estate planning opportunity.

There can be little doubt that a parent's expenses in respect of a child will usually peak when the child reaches university-going age at around the age of eighteen. Thus for a parent facing the prospect of funding a three to five year degree, a way of funding university fees with pre-tax income should be an opportunity worth at least some consideration.

The age of eighteen is significant in this context because it is the age at which a child ceases to be a minor. From an income tax perspective it is also the age at which the deeming provisions contained in section 7(3) of the Income Tax Act cease to apply to income which is attributable to a parent’s gratuitous disposition.

Section 7(3) is applicable where income accrues to a minor child by reason of a donation, settlement or other disposition made by a parent of the child. When applicable, the section deems the portion of the income received by or accrued to the minor child to be that of the donor-parent.

An interest free loan to a trust has been held to be a gratuitous disposition falling within the scope of section 7(3) and the income which is attributable to the interest free loan has been held to be that of the parent and not of the minor child to whom the income accrued.

However, section 7(3) refers specifically to "minor child". Once the child ceases to be a minor (at age eighteen) or by marriage, prior to turning 18, the deeming provisions of section 7(3) no longer apply and the minor will be taxed on all the income accruing to him/her.

In the Minister of Finance’s Budget speech during February this year he announced an increase in both the income tax thresholds as well as the basic interest exemption. These amounts have now been published as part of the Draft Taxation Laws Amendment Bill which will become law later this year.

The new income tax thresholds and basic interest exemption for persons under the age of sixty-five are R59 750 and R22 800 respectively. Therefore, assuming an investment return of 8% - it is possible for a parent to dispose of - by way of an interest-free loan to a child, or to an inter vivos trust established for the benefit of the child - an interest producing investment of R1 031 875 without any taxable income being attributable to him.

In addition, no tax will be payable by the child because income accruing to the now adult child will be below the annual tax threshold. It is, in a sense, therefore, possible for parents to fund university fees out of pre-tax income.

Note that section 7(3) ceases to apply "from the date" that a child ceases to be a minor. This means that where a child attains majority during the tax year it will be necessary to do an apportionment of the deemed income so that the donor-parent is only taxed on the income accruing to the child during the portion of the tax year during which he was a minor.

Reducing the parent’s estate for estate duty purposes

By reducing the loan due by the trust using the parent’s annual donations tax concession of R100 000 per parent, the loan account can be settled by the time that the child eventually finishes his/her studies.

In this way, the parent is not only saving 40% on university fees but also saving estate duty on the asset/s transferred to the trust.

Cautionary: Note that where the loan account has been reduced by utilising annual donations, the income which no longer accrues to or is received by the minor child will once again accrue to the parent/s - this time in terms of section 7(5) of the Act.

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1 S 5 of the Children’s Act 38 of 2005.