Tax implications of interest-free
loans and waiver of debt
Professor Jackie Arendse
University of the Witwatersrand
15 May 2013
1
INTEREST-FREE LOANS AND STC
2
Deemed dividend – s 64C(2)
an amount is deemed to be a dividend declared by a company
to a shareholder where
• (b) the shareholder or any connected person in relation to
that shareholder is released or relieved from any obligation
measurable in money which is owed to that company by
that shareholder or connected person, to the extent that
the amount so owed was not already deemed to be a
dividend declared by that company in terms s 64C(2)(g)
• (c) any debt owed by the shareholder or any connected
person in relation to that shareholder to any third party is
paid or settled by that company
• (g) any loan or advance is granted and made available to
that shareholder or connected person in relation to that
shareholder
3
Exemption provisions - s 64C(4)
• The deemed dividend rule will not apply if
– interest has been charged on the loan at a rate at
least equal to the ‘official rate of interest’ for
fringe benefits tax purposes (s 64C(4)(d)). This rate
is currently 6% per annum.
– the loan is repaid or otherwise extinguished by
the end of the following year of assessment (i.e.
the year following the year in which the loan is
advanced) (s 64C(4)(f)).
4
EG 1
• ABC CC advanced an interest-free loan of R500
000 to its member, Joe Bloggs, on 1 May 2010.
ABC CC’s financial year ends on the last day of
February each year. The loan has not yet been
repaid.
5
Result:
• The financial statements of ABC CC for the years
of assessment ended 28 February 2011 and 29
February 2012 will reflect a loan to Joe Bloggs of
R500 000.
• The loan does not carry any interest, was
advanced during the year ended 28 February
2011 and has not been repaid by the end of the
following year, i.e. by 29 February 2012.
• The full amount of the loan is therefore a deemed
dividend under s 64C(2)(g) and STC is payable on
the loan at the rate of 10%. ABC CC therefore has
a STC liability of R50 000 (R500 000 x 10%).
6
Date of the dividend
• Where the deemed dividend provision applies as
a result of an interest-free loan, the dividend is
deemed to have been declared by the company
on the date that the loan was made available (s
64C(6)).
• Under the STC rules, the dividend cycle ended on
this date and the STC was due and payable by the
end of the following month.
• Interest will be charged by SARS on any STC
liability that remains unpaid after the due date
for payment.
7
Result:
• In the above example a dividend of R500 000
was deemed to be declared in May 2010 and
the STC should therefore have been paid by 30
June 2010.
• Assuming SARS raises an assessment for STC
of R50 000 in April 2013, interest will also be
payable on the R50 000, calculated at the
prevailing interest rate (currently 8.5%) from 1
July 2010 until 31 March 2013.
8
Definition of ‘connected person’ – s 1
• Any member of a CC is a connected person to that CC.
• A non-company shareholder of a company other than a
CC is a connected person to the company if he owns
(either alone or together with any connected person in
relation to himself, e.g. any of his relatives) at least
20% of the shares in that company.
• A company that owns at least 20% of the equity shares
in another company is a connected person to that
other company if there is no majority shareholder in
the company.
9
Application of s 64C(2)(g)
CC b
CC a
CC c
MR x
10
INTEREST-FREE LOANS - DIVIDENDS
TAX PROVISIONS
11
Subsequent exemptions
• The s 64C(2) deemed dividend rule does not
apply to the extent that the debt has already
been taxed as a deemed dividend under the
STC provisions (s 64E(4)(e)).
• There is exempt from dividends tax any
dividend other than a dividend in specie to the
extent that the dividend was subject to STC
12
Subsequent repayment of the loan
• No further tax implications
• The repayment is deemed to be a dividend
that accrued to the company on the date the
amount is repaid (s 64C(5))
– after 31 March 2012, the last day on which STC
credits could be created
– repayment does not give rise to a STC credit
13
Deemed dividend in specie - s 64E(4).
• Where a debtor owes an amount to a company
‘by virtue of a share held in that company’ during
a year of assessment AND the following three
conditions are present:
1. The debtor is a person other than a company;
2. The debtor is a resident; and
3. The debtor is either a connected person to the
company or a connected person to that connected
person.
• the company is deemed to have paid a dividend
in specie on the lat day of the year of assessment
14
Amount of the deemed dividend
• Calculated by applying a notional interest rate to
the loan account balance during the year
• Notional interest rate = the difference between
– the official interest rate (currently 6% as explained
above) and
– actual interest rate charged on the loan.
• Only value of the interest differential is a deemed
dividend, not the capital amount of the loan.
• Dividends tax is calculated at 15% on the amount
of the deemed dividend and must be paid to
SARS by the end of the month following the yearend.
15
EG 2
• XYZCC advanced an interest-free loan of R100
000 to its member, Sally Shabangu, on 1 April
2012.
• The loan balance has remained unchanged.
• XYZ CC’s financial year ends on the last day of
February each year.
16
Result:
• XYZ CC is deemed to have paid a dividend on
28 February 2013.
• The amount of the dividend is R5 500 (R100
000 x 6% x 11/12)
• Dividends Tax = R850 (R5 500 x 15%)
• XYZ CC had to pay this amount to SARS by no
later than 29 March 2013 (the last business
day of the month) to avoid interest being
charged
17
LOANS TO TRUSTS
18
Transferring assets to a trust
•
•
Donation
Sale at MV
–
Interest on loan a/c ?
•
–
Repayment terms
•
–
Is there a quid pro quo (Refer Brummeria principles)
Is there an expectation of repayment (refer NWK
principles)
Waiver of loan: CGT implications
19
Loan accounts
• Par 12(5) – applies until end of 28/2/2013
year of assessment
• Replaced by par 12A – applies from 1 January
2013 and applicable in respect of years of
assessment commencing on or after that date
20
Case law on loans and wills under
para 12(5)
• ITC 1793 (67 SATC 256)
– "I bequeath my estate as follows…Any amount
which may be owing to me by [the trust] under
the loan account, to [the trust]."
– Held that the bequest of an amount owing by a
debtor, also a trust, to that debtor as legatee, ie as
a specific bequest, fell foul of para 12(5) of the
Eighth Schedule
21
ITC 1835 (71 SATC 105) (2009)
• It was clear from the wording of the will that the testatrix’s
intention was that her loan account to the trust should form part
of the residue of the estate, and it was not separately bequeathed
to the trust as a legacy.
• The trust had at all material times been financially able and in a
liquid position to repay the loan had the testatrix demanded
payment thereof before her death.
• The will was a joint will of the testatrix and her husband, and the
debt had been due by the trust to the testatrix, not her husband.
The testators had jointly disposed of the residue of their estates in
the joint will, and this showed that they had in mind no specific
bequests of any of their individual or separate assets to either the
trust or any other person, apart from the household effects etc
expressly awarded as a legacy in terms of the will.
• Had it been the intention of the testatrix to relinquish her claim in
favour of the trust, she could easily have expressed such intention
in the will. She had not done so, and this was confirmed by the
precise wording of the will.
22
ITC 1835
• Accordingly, the testatrix’s claim for the amount of her loan account
formed part of the residue of the estate, and it had not been her
intention to dispose of this claim in favour of the trust for no
consideration as contemplated in para 12(5).
• Did the method employed by the executor in winding up the estate,
whereby the relevant claim was not recovered from the trust but
merely awarded to it as the sole residuary heir, bring this ‘award’ within
the purview of para 12(5) ?
• The answer to this question lay in the wording of para 12(5) itself.
• What was contemplated in para 12(5) was an act by the creditor
whereby s/he consciously intended to discharge the debt for no
consideration. The determining factor was the intention of the creditor
to dispose of the debt, not the subsequent manner in which his or her
estate was administered.
• It was clear that the intention of the testatrix had not been to discharge
the debt for no consideration.
• Para 12(5) therefore N/A
23
Recommended wording…
• I record that the XYZ Trust is indebted to me on loan
account in the amount of R….
• I hereby direct that on my death my executor must
demand repayment of the loan account from the XYZ
Trust.
• I hereby bequeath an amount of money equal to the
amount owing to me under the loan account, to the
XYZ Trust.
• I hereby direct that my executor shall be entitled to
apply set-off in relation to the amount due under the
loan account and the amount under the bequest.
24
• the executor must show the loan account as
an asset in the liquidation account
• and show the bequest as an asset in the
distribution account
• no funds would flow as the executor would
apply set-off.
25
Paragraph 12A
• Where a debt has been reduced and
– the debt funded the acquisition of a capital asset
– the amount of the reduction exceeds any
consideration for the reduction
• Reduction less consideration = ‘reduction amount’
• If the capital asset is still held:
– Reduce the base cost by the reduction amount
– Any excess reduces any assessed capital loss
– Any further excess is recouped under s 19 IF the
asset is an allowance asset
26
If the capital asset is no longer held:
• Allowance asset: reduction amount is
recouped under s 19
• Assets other than allowance assets: assessed
capital loss is reduced by the reduction
amount
– excess: no further tax consequences
27
Para 12A is N/A to any debt owed by a person • that is an heir or legatee of a deceased estate, to the extent
that –
– the debt is owed to that deceased estate;
– the debt is reduced by the deceased estate; and
– the amount by which the debt is reduced by the deceased
estate forms part of the property of the deceased estate
for Estate Duty Act purposes
• to the extent that the debt is reduced by way of – donation as defined in s 55 (1); or
– any transaction to which s 58 applies
28
Para 12A is N/A to any debt owed by a person • to an employer of that person, to the extent that the debt is
reduced in the circumstances contemplated in para 2(h) of the
Seventh Schedule;
• to another person where that person and the other person are
companies that form part of the same group of companies as
defined in s 41, unless there is a transaction, operation or
scheme entered into to avoid any tax
• that is a company, where – the debt is reduced in the course, or in anticipation, of liquidation,
winding up, deregistration or final termination of that company; and
– the creditor is a connected person
– Certain conditions apply
29