The National Treasury informed its plans to introduce a new section into the Income Tax Act that will address the avoidance of estate duty by moving assets to a trust. The National Treasury is concerned abut the interest free loans or loans with interest below market rates without being subject to either donations tax or estate duty, which is a common approach in South Africa.
Trusts and their perceived use to transfer wealth without paying either donations tax or estate duty have been criticized in the South African. On February 2016, the National Treasury has issued a warning to stop tax avoidance through the use of trusts, which already had been issued before. The National Treasury indicated that amendments to the Income Tax and Estate Duty Acts will take place this year.
The new provisions provide that any individual who sells assets to a trust in relation to which he or she is a connected person and finances those assets by way of a loan at an interest rate that is less than the official interest rate (currently 8% in terms of the Seventh Schedule of the Income Tax Act), will be subject to income tax on the deemed interest. It would also apply to a loan made to a trust by a company in which that individual holds more than 20% of the equity shares or voting rights. If approved, the measures will take effect in their current form on March 1, 2017.
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