Budget 2021/22 – Trusts: More anti-avoidance rules

Trusts are versatile legal constructs or arrangements that are often used for tax planning purposes, inter alia with a view to avoid estate duty on appreciating assets. However, the line is sometimes very thin between legitimate tax planning and schemes that are, at least from a policy point of view, considered unacceptable avoidance arrangements.

The list of specific anti-avoidance rules that have been introduced in relation to trusts over the years is long. These include, most notably, the introduction of section 7C of the Income Tax Act, which effectively disincentivises the transfer of an asset to a trust by a connected person on interest-free or low-interest loan account or simply granting interest-free or low-interest credit to a trust for purposes of acquiring an asset in that trust. The amount by which the interest is less than the official rate of interest will be treated as a donation in the hands of the creditor. In addition, no deductions or losses may be claimed in respect of a disposal of such loan.

These rules have been strengthened to also cover debtor companies whose shares are held by trusts. Specifically, the rules have also been widened to include preference share funding and not only loan funding.

We anticipate that specific amendments will be made to section 7C to address this issue.

It was also proposed in the Budget that certain changes will be made to curb certain schemes involving the cession of rights to receive or use assets. These schemes often involve trusts (although not always).

A service provider could, in principle, arrange its affairs in such a manner so as to cede a right to receive or use an asset (such as the right to receive or use an asset from a client or employer to whom services were or are to be rendered) to a trust for no consideration (such as a family trust).

Theoretically, the service provider could avoid income tax on the basis that no value could yet be attached to the right or asset at the time of cession. The service provider could also avoid donations tax on the basis that the right has no value at the time of cession. The service provider would also not be regarded as having disposed of the asset as the service provider will not at that time be entitled to the asset yet. Value would likely only arise at some later stage.

Details as to the specific amendments have not yet been revealed but it is anticipated that they could include amendments to the definition of gross income and to the donations tax provisions.

It was proposed in the Budget that the rules will be widened even further. The new rules will look specifically at loan transfers between trusts. Essentially, it is possible for parties to make use of multiple trusts, and by transferring loans between such trusts, theoretically avoid the application of section 7C.

Author: Heinrich Louw.