Utilisation of trusts as a planning tool remains under the microscope

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Author: Jerome Brink

Historically many individuals made use of estate planning schemes through trusts, whereby taxpayers would transfer assets to a trust and the purchase price owed by the trust to the taxpayer in respect of the assets would be left outstanding as a loan, advance or credit in favour of that taxpayer on which no interest or very low interest would be charged. Alternatively, taxpayers would advance a low interest or interest-free cash loan, advance or credit to a trust in order for the trust to use the money to acquire assets.

The use of these schemes often resulted in donations tax not being leviable on the basis that such transfers would be treated as sale transactions and not donations. Furthermore, on occasion, the amount that was owed to the taxpayer (i.e. the loan claim) would remain outstanding indefinitely and the trust would likely have no real intention to pay it off. In some instances taxpayers would reduce or waive the loan which would then not form part of his/her estate for purposes of estate duty, notwithstanding that taxpayers could make their dependents, beneficiaries of the trust.
The use of these estate planning schemes have been under the microscope in recent times which culminated in the introduction of anti-avoidance measures in the Act. In order to limit taxpayers ability to transfer wealth to a trust without being subject to tax, section 7C of the Act was introduced with effect from 1 March 2017. In simple terms, interest foregone in respect of low interest loans or interest free loans that are made to a trust are now treated as an ongoing and annual donation made by the natural person to the trust on the last day of the year of assessment of that trust. Effectively, one then has to make a decision as to whether to charge interest on the loan at market related rates which would be taxable in the hands of the holder of the loan and which may or may not be deductible in the hands of the trust. Alternatively, in the event one does not charge interest, the donor would be liable for donations tax on the interest foregone.National Treasury identified further schemes aimed at avoiding the application of section 7C of the Act whereby taxpayers advanced interest free or low interest loans to companies whose shares are held by trusts. The anti-avoidance rules in section 7C were thus strengthened in 2017 by extending the application of section 7C to the scenario where natural persons or a company (at the instance of a natural person) advance interest free or low interest loans to a company that is held by a trust that is a connected person in relation to a natural person or a beneficiary of such trust.Notwithstanding the strengthening of the rules, National Treasury has identified a further scheme aimed at circumventing the application of the section 7C rules. In this regard, instead of advancing a loan, advance or credit, taxpayers subscribe for preference shares in a company owned by a trust that is a connected person in relation to the natural person. In this manner, the preference shares would not constitute a loan, advance or credit as envisaged in section 7C of the Act thereby circumventing the relevant provisions. As a result, the Minister announced in the Budget that in order to curb this new form of abuse, further rules preventing tax avoidance through the use of trusts would be introduced.

Given the proposal it is clear that the utilisation of trusts for estate planning and other purposes will remain under the microscope with particular reference to implementing various schemes aimed at utilising such trusts for purposes of shielding growth assets.