As anticipated, the proposed amendments to the trust legislation attracted the most public comment in the draft response document to the draft Taxation Law Amendment Bill, 2016 (TLAB). The commentary and questions raised seemed to alert National Treasury to the fact that the new legislation had some unintended consequences.

This led to the issuing of a second batch of draft legislation on 21 September 2016, with further amendments to the proposed trust legislation. Although it appears as though the additional amendments may satisfy some of the concerns raised by the public, it simultaneously adds new concerns.

The most significant amendment relates to the taxation of the notional amount that must be calculated on low interest or interest free loans to trusts. It is still proposed that the notional amount be calculated as the
difference between the interest determined with reference to the official rate of interest (currently 8% per annum) and the actual interest rate of the loan. However, the new proposed amendments is a slight improvement to the previous amendments, because it taxes the notional amount as a donation (subject to a 20% tax rate) instead of income (which could be subject to a maximum of 41%). Furthermore, the proposed
amendment to the restriction on the use of the R 100,000 annual donations tax exemption against the outstanding loan balance has also been removed.

National Treasury has addressed the unintended consequences by providing for a number of situations where the proposed section 7C will not be applicable. These include trusts that are Public Benefit Organisations, vesting trusts, special trusts established solely for the benefit of persons with disabilities, loans used to fund the acquisition of primary residence in a trust, loans to which the transfer pricing legislation in section 31 applies, loans provided to a trust in terms of Sharia compliant finance agreement and trusts with a loan which has already attracted dividends withholding tax (according to section 64E(4)).

Overall, we see that the new draft amendments to section 7C is aimed at high net worth individuals. As the proposed legislation currently reads, taxpayers with an interest free or low interest loan to a trust of equal to, or less than, R 1 250 000 will not be paying any additional tax since the deemed donation will be equal to, or less than, R 100 000 (R1 250 000 x 8%). Therefore, the annual donation tax exemption of section 56(2)(b) will result in the taxpayer paying no donations tax. However, in the situation where a taxpayer has an interest free loan equal to R 10 million owing to a trust, the donations tax charge payable by the taxpayer would amount to R 140,000 per annum [{(R10m x 8%) - 100,000} x 20%].

Notwithstanding the above, the amendments appear to only be the beginning. Taxpayers should grow accustom to the words "amendments to trust legislation"
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