PROPOSED CHANGES TO TAX LAW IN SOUTH AFRICA: INTERESTFREE LOANS AS A TOOL IN ESTATE PLANNING?

Year 2016, Volume: 8 Issue: 2, 237 - 254, 01.12.2016

M. J. Preston H. Kloppers

Abstract

Estate planning often involves the sale of an asset by an estate planner (the owner
of the asset) to an inter vivos trust, as a related family trust. It also often happens
that the buying trust does not have the necessary funds to pay the purchase price.
In this situation it is common practice to finance the sale by means of an interestfree
loan agreement. The buying trust becomes the owner of the property, while
the purchase price remains due and payable to the seller, without the loan amount
accruing interest. The result achieved by the estate planner is that potential further
growth of the asset soldis shifted to the trust, resulting in an estate duty benefit for
the seller. The debate surrounding the use of the interest-free loan as an estate
planning tool has been polarised for years with most researchers concluding that
the interest-free loan remains a useful estate planning tool. Doubts regarding the
use of such agreements and the trust for estate planning have recently neem
renewed. Since 2013, several statements by the different Ministers of Finance, in
their respective budget speeches, indicated that government will propose tax
avoidance legislation that will directly impact the taxation of trusts and connected
parties to a trust. This study will focus on the effect which the recent proposed
changes to the Income Tax Act (58 of 1962) might have on the use of interest-free
loans as an estate planning tool. The study is qualitative in nature with document
analysis at its core. The main aim is to provide more clarity to estate planners in
this regard. The research concludes that the interest-free loan still has some
advantage as an estate planning tool, but if estate planning is done with only tax
planning and tax savings as motivation, that advantage may disappear.

Keywords

Trusts, interest-free loans, income tax, taxation, estate duty, Wealth tax

References

• BDO (South Africa) (04.10.2016), Warneke, Loans to Trusts – Latest Developments, latest-developments [Accessed 26.10.2016] https://www.bdo.co.za/en-za/insights/2016/tax/loans-to-trusts
• Botha, Rossini, Geach, Goodall and Du Preez (2013), “Estate planning”, (in Paul
• Rabenowitz, P. Managing Ed., The South African Financial Planning Handbook) LexisNexis: Durban. Bowen (2009), “Document Analysis as a Qualitative Research Method”
• Qualitative Research Journal, Vol. 9, No. 2, pp. 27-40. Burger (2011), The future of trusts as an estate planning tool. Potchefstroom:
• North-West University (Mini-dissertation – M.Com (Taxation)). Carroll (2010), SARS’ ability to attribute trust income and capital gains to a donor-parent. Potchefstroom: North-West University (Mini-dissertation - LL.M).
• Cohen (2009), “Does Brummeria Sweep clean? A US Tax-law perspective” South
• African Law Journal, pp.489-504. Dachs (2008), “Brummeria prompts talk” International Tax Review, pp. 83-84.
• Davis Tax Committee (2014), First Interim Report on Macro Analysis for the Minister of Finance, http://www.taxcom.org.za/library.html 06.2016] Accessed
• Davis Tax Committee (2015), First Interim Report on Estate Duty for the Minister of Finance, 06.2016] http://www.taxcom.org.za/library.html Accessed
• De Vos, Strydom, Fouche and Delport (2011), Research at grass roots for the social and human service professions, (fourth edition) Pretoria: Van Schaik.
• Die Beeld (17.07.2016), Loubser, So raak nuwe belastingwet trusts, http://www.netwerk24.com/Sake/Geldsake/so-raak-nuwe-belastingwet-trusts- [Accessed 17.07.2016]
• Jansen van Rensburg (2008), “Commissioner, South African Revenue Service v
• Brummeria Renaissance (Pty) Ltd and Other: Does the judgement benefit an understanding of the concept ˈamountˈ?”, Stellenbosch Law Review, pp. 35-50. Jurinski and Zwick (2013), “Why Tax Minimization is Overrated in Estate
• Planning”, Journal of Financial Service Professionals, Vol. 67, No. 2, pp.53-61. Landbou.com (12.08.2016), Van Wyk, Jan Taks will groot hap uit trusts vat, http://landbou.com/nuus/jan-taks-wil-groot-hap-uit-trusts-vat/ 08.2016] Accessed
• Olivier, Strydom, and Van den Berg (2011), Trust Law and Practice service,
• (Issue 3) Durban: LexisNexis. Ostler (2013). Interest-free loans – http://www.schoemanlaw.co.za/wp-content/uploads/2013/06/Interest-Free
• Loans-The-Situation-Post-March-2013.pdf [Accessed 20.02.2014]
• Petersen (2013), Taxation of a trust: The impact of statutory anti-tax avoidance measures on the effectiveness of the discretionary family trust as an estate planning vehicle in South Africa. Bellville: University of the Western Cape (LLM-dissertation).
• Preston (2014), Interest-free loans or low-interest loans and estate planning: Life after Brummeria. Potchefstroom: North-West University (Mini-dissertation – LL.M).
• Smit (2008), The impact of the Brummeria Renaissance case in determining whether the receipt of an interest-free loan results in gross income accruing to the borrower. Stellenbosch: University of Stellenbosch (M.Com-dissertation (Taxation)).
• South African Revenue Service (2010), Interpretation note: No. , http://www.sars.gov.za/AllDocs/LegalDoclib/Notes/LAPD-IntR-IN-2012-58- Arc-57%20
• %20IN58%20Issue%201%20Archived%20on%2030%20June%202010.pdf [Acce ssed 24.04.2016]
• South African Revenue Service (2012), Binding General Ruling (Income Tax):
• No. 8 (Issue 2), http://www.sars.gov.za/AllDocs/LegalDoclib/Rulings/LAPD- IntR-R-BGR-2012-08%20-%20Brummeria%20Case%20Principles.pdf [Accessed 08.2016]
• South Africa National Treasury (2013), 2013 Budget Speech, BSpeech-012013%20
• Budget%20Speech%20by%20the%20Minister%20of%20Finance%20- %20February%202013.pdf [Accessed 31.07.2016]
• South Africa National Treasury (2015), Legal & Policy Income Tax;
• Comprehensive Guide to Capital Gains Tax (Issue 5), http://www.sars.gov. za/AllDocs/OpsDocs/Guides/LAPD-CGT-G01%20-%20Comprehensive%20 Guide%20to%20Capital%20Gains%20Tax%20-%20External%20Guide.pdf Accessed 13.08.2016]
• South Africa National Treasury (2016), 2016 Budget Speech, BSpeech-012016%20
• %20Budget%20Speech%20by%20the%20Minister%20of%20 %20February%202016.pdf [Accessed 24.04.2016] Finance%20
• South African Revenue Service (2016), Draft Explanatory Memorandum to the draft Taxation Laws Amendment Bill, 2016,
• AllDocs/LegalDoclib/Drafts/LAPD-LPrep-Draft-2016-46%20-%20Draft%20
• Explanatory%20Memorandum%20to%20the%20draft%20Taxation%20Laws%20 Amendment%20Bill,%202016.pdf [Accessed 17.07.2016]
• South African Revenue Service (2016), Draft Response Document (2016 Draft
• Taxation Laws Amendment Bill (TLAB) and Draft Tax Administration Laws Amendment Bill (TALAB), 2016, http://www.sars.gov.za/AllDocs/LegalDoclib/
• Drafts/LAPD-LPrep-Draft-2016-87%20-%202016%20Draft%202nd%20Batch
• %20%2021%20Sep%202016%20-%20SCOF%20-% [Accessed 26.10.2016]
• South African Revenue Service (2016), Draft Taxation Laws Amendment Bill, ,
• %20%E2%80%93%20Draft%20Taxation%20Laws%20Amendment%20B ill,%202016.pdf [Accessed 17.07.2016]
• South African Revenue Service (2016), Draft Taxation Laws Amendment Bill,
• (Second Batch) http://www.sars.gov.za/AllDocs/LegalDoclib/Drafts/LAPD- LPrep-Draft-2016-84%20
• %20Draft%20TLAB%20revisions%20and%20additions%20for%20public%20co mment%2025%20September%202016.pdf [Accessed 26.10.2016]
• Spearman (2011), The valuation of amounts for the purpose of inclusion in gross income. Grahamstown: Rhodes University (M.Com-thesis (Accounting)).
• Stiglingh, Koekemoer, Van Zyk, Wilcocks and De Swardt (2015), “Trusts”, (in
• Madeleine Stiglingh – volume Ed., SILKE: South African Income Tax) LexisNexis: Durban, pp. 832-862. Tennant (2010), The nature of interest-free loans and the tax implications thereof.
• Potchefstroom: North-West University (Mini-dissertation – M.Com (Taxation)). West and Surtees (2002), “The court decision in the case of Woulidge – A practical application”, Meditari Accountancy Research, Vol. 10, pp. 259-294. South African Acts:
• Estate Duty Act 45 of 1955. Income Tax Act 58 of 1962.
• National Credit Act 34 of 2005. Law reports:
• South Africa 1955. Commissioner for Inland Revenue v Widan 1955 (1) SA 226 (A)
• South Africa 1962. Commissioner for Inland Revenue v Berold 1962 (3) SA 748 (AD)
• South Africa. 2007. Commissioner for the South African Revenue Service v
• Brummeria Renaissance (Pty) Ltd and others 2007 (6) SA 601 (SCA).