Does a low-interest loan between relatives have any tax implications?
30 June 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: Husband and
wife borrow money from the wife’s father at a low interest rate (lower than the
official rate). Does connected persons come into play here and will there be an
income tax implication due to the low interest rate or does it not apply to
transactions between individuals (the definition of connected person in s1
refers to a natural person and any relative)?
We could only find reference to low interest transactions in
the 7th Schedule dealing with fringe benefits. A paragraph in the
loan agreement stipulates that the National Credit Act does not apply "to the
transaction since it does not constitute a credit agreement at arm’s length”.
A: We accept that
there is no tax benefit involved in this and will therefore not deal with
impermissible tax avoidance arrangements.
The parties will be connected persons in relation to each
other. We can’t comment on the National Credit Act implications as that is
outside the scope of the tax related service offered by SAIT.
We may need more detail to provide the guidance
required. From the facts it doesn’t
appear that section 7 applies or that one of the parties is not a resident of
the RSA. It is commonly accepted that
where interest is charged at less than a market related rate an element of gratuitousness
is involved. This may have an influence
where an asset was acquired – see the attribution rules in the Eighth Schedule
to the Income Tax Act.
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.