Trust hangover continues

Etienne Louw, Senior Tax Consultant at Mazars.

At no point in recent memory has SARS been so persistent in targeting the perceived abuse of trusts. With the imminent introduction of new trust legislation, housed in Section 7C, a number of taxpayers have been scrambling to find commercially justifiable solutions to limit its application.

Section 7C is an anti-avoidance measure primarily aimed at curbing the tax free transfer of wealth to trusts through the use of low or interest free loans. Any interest foregone as a result of the low or interest free loan, which was provided by a connected person in relation to the trust, is treated as a donation which will be subject to a 20% donations tax rate. It is important to note that section 7C does not apply where the loan is owing by a company to an individual.

A solution proposed by a number of tax advisors was to utilise the corporate roll-over relief provisions set forth in the Income Tax Act to transfer assets (acquired by the trust on interest free loan account) to a newly incorporated company (“Newco”). As part and parcel to the transfer of the assets, the Newco also assumes the loan as part settlement of the purchase price. This transaction (colloquially known as an asset-for-share transaction) involves the disposal by the trust of an asset and in exchange Newco issues equity shares to the trust and assumes the loan claim.

The transaction would result in no adverse tax consequences and the individual would now hold the loan claim against Newco (as opposed to the trust). Consequently, Section 7C would not find application.

Unfortunately it seems that SARS has got wind of the aforementioned solution. During the Budget Speech it was held that additional measures will be implemented to counter the perceived abuse. It would be interesting to see what exactly these measures will be as such measures could have unintended consequences for legitimate transactions involving corporate restructures.