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Does a low-interest loan between relatives have any tax implications?

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



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