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Does section 7(8) apply where a resident lends to a foreign trust at an interest rate below prime?

30 June 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: If a South African resident loans money to a foreign trust and raises interest on this loan but not at the prime rate will section 7(8) apply to the portion of the income that is "under" the prime rate?

A: We accept that section 31 of the Income Tax Act doesn’t apply. 

For section 7(8) to apply an amount must be received by or accrue to any person who is not a resident by reason of or in consequence of any donation, settlement or other disposition made by any resident. 

The courts have held (with regard to section 7(5)) that the potentially all-embracing words 'other disposition' should also mean other gratuitous disposition (Joss v SIR 1980 (1) SA 664 (T), 41 SATC 206; Ovenstone v SIR1980 (2) SA 721 (A), 42 SATC 55). As a result of this approach to the section the courts found that were there to be both an onerous and a gratuitous element to the transaction an apportionment would be permissible. Thus if a person sells assets to a trust set up for the benefit of his minor children at fair market value but refrains from charging interest on the loan, the transaction is partly onerous (the sale) and partly gratuitous (the interest-free loan). 

We submit that the same will apply for purposes of section 7(8) and that an apportionment is therefore required.  The adjustment is not necessarily based on the prime rate.  

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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