In 2016 the legislator proposed amendments to income tax law in South Africa in an attempt to close the perceived loophole that was used by taxpayers for avoiding estate duty and donations tax by transferring assets to a Trust by using interest-free loans.

In our previous communication on this topic, we discussed how the legislator was proposing to tax the difference between the amount incurred by the trust in respect of a year of assessment and the amount that would have been incurred at the official rate of interest, in the hands of the taxpayer who transfers assets to a trust by selling the assets to the trust on loan account.

The proposal amendments drew much criticism from various interested parties who raised their dissatisfaction during the public comments process. The issue, according to them, was that the proposed anti-avoidance measure was flawed, as the legislator was using an income tax instrument (treatment of interest foregone as income) to address estate duty and donations tax avoidance.

On 19 January 2017, we saw the promulgation of the Taxation Laws Amendment Act ("Amendment Act") and the revision of the initial proposed amendments. The legislator has now deemed the interest forgone in respect of interest-free or low interest loans as an on-going and annual donation as opposed to income in the hands of the seller.

Provided there are no changes or postponement of the provisions of section 7C, the law as it stands is that the interest amount will now be taxed as a donation at the rate of 20% rather than being taxed at the seller's income tax rate with a maximum of 41%. Furthermore, the seller can now utilise the annual R100 000 exclusion for donations tax, allowing the seller to reduce the capital amount owed to him by the trust by donating R100 000 without adverse tax consequences.

The legislator has also excluded certain amounts owed by a trust in respect of loans/advances or credits from the provisions of section 7C.

Previously, the legislator did not address the issue regarding any loan, advance or credit that was already in place and only stated that the section 7C provisions will come into operation on 1 March 2017. However, with the Amendment Act, the legislator has made it clear that the section 7C provisions will be applicable in respect of any amount owed by a trust in respect of a loan, advance or credit provided to that trust before, on, or after 1 March 2017.

Even though the amended provision seems less onerous on the taxpayer, and this appears to be true going forward, it is however, not good news for taxpayers who currently use this manner to transfer the assets to a Trust.

There is no one solution for taxpayers that currently use interest-free loans to transfer assets to trusts and, as such, the circumstances of each case should be assessed on its own merits in order to decide on the best solution to deal with the tax implications imposed by the provisions of section 7C.