Tax implications of interest-free loans and waiver of debt
Professor Jackie ArendseUniversity of the Witwatersrand15 May 2013
INTEREST-FREE LOANS AND STC
Deemed dividend – s 64C(2)
an amountis deemedto be a dividend declared by a company to ashareholderwhere(b)the shareholder or any connected person in relation to that shareholderis releasedor relieved from any obligation measurable in money whichis owedto that company by that shareholder or connected person, tothe extentthat the amount so owed was not already deemed to be adividend declaredby that companyintermss 64C(2)(g)(c) any debt owed by the shareholder or any connected person in relationto thatshareholder to any third party is paid or settled by thatcompany(g) any loan or advance is granted and made available to that shareholderor connectedperson in relation to thatshareholder
Exemption provisions- s 64C(4)
Thedeemed dividend rule will not apply ifinteresthas 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.theloan 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)).
ABCCC advanced an interest-free loan of R500 000 to its member, JoeBloggs, 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.
The financial statements of ABC CC for the years of assessment ended 28 February 2011 and 29 February 2012 will reflect a loan to JoeBloggsof 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%).
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)).Underthe STC rules, the dividend cycle ended on this date and the STC was due and payable by the end of the following month.Interestwill be charged by SARS on any STC liability that remains unpaid after the due date for payment.
Inthe 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.AssumingSARS 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.
Definition of ‘connected person’ – s 1
Anymember 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.
Application of s 64C(2)(g)
INTEREST-FREE LOANS - DIVIDENDS TAX PROVISIONS
The s 64C(2) deemeddividend ruledoesnot apply to the extent that the debt has already been taxed as a deemed dividend under the STC provisions (s 64E(4)(e)).Thereisexempt from dividends tax any dividend other than a dividendin specieto the extent that the dividend was subject to STC
Subsequent repayment of the loan
No further tax implicationsThe repaymentis deemed to be a dividend that accrued to the company on the date the amount is repaid (s 64C(5))after31 March 2012, the last day on which STC credits could becreatedrepayment does not give rise to a STCcredit
Deemed dividendin 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 thefollowing three conditions are present:The debtor is a personother than a company;The debtor is aresident; andThe debtor is either aconnected personto 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
Amount of the deemed dividend
Calculatedby applying a notional interest rate to the loan account balance during theyearNotionalinterest rate= thedifference betweentheofficial interest rate (currently 6% as explained above) andactualinterest rate charged on the loan.Only value of theinterest differential is a deemed dividend, not the capital amount of the loan.Dividends tax is calculatedat 15% on the amount of the deemeddividend and must be paid to SARSby the end of the month following the year-end.
XYZCCadvanced an interest-free loan of R100 000 to its member, Sally Shabangu, on 1 April 2012.Theloan balance has remained unchanged.XYZCC’s financial year ends on the last day of February each year.
XYZ CCis deemed to have paid adividend on 28 February 2013.The amount of the dividend isR5 500 (R100 000 x 6% x 11/12)DividendsTax= R850(R5 500 x 15%)XYZCC had to pay this amount to SARS by no later than 29 March 2013 (the last business day of the month) to avoid interest beingcharged
LOANS TO TRUSTS
Transferringassets to atrust
DonationSale at MVInterest on loan a/c ?Is there a quid pro quo (ReferBrummeriaprinciples)Repayment termsIs there an expectation of repayment (referNWKprinciples)Waiver of loan: CGT implications
Par 12(5) – applies until end of 28/2/2013 year of assessmentReplaced by par 12A – applies from 1 January 2013 and applicable in respect of years of assessment commencing on or after that date
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
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.
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
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.
the executor must show the loan account as an asset in the liquidation accountand show the bequest as an asset in the distribution accountno funds would flow as the executor would apply set-off.
Where a debt has been reduced andthe debt funded the acquisition of a capital assetthe amount of the reduction exceeds any consideration for the reductionReduction less consideration = ‘reduction amount’If the capital asset is still held:Reduce the base cost by the reduction amountAny excess reduces any assessed capital lossAny further excess is recouped under s 19 IF the asset is an allowance asset
If the capital asset is no longer held:
Allowance asset: reduction amount is recouped under s 19Assets other than allowance assets: assessed capital loss is reduced by the reduction amountexcess: no further tax consequences
Para 12A is N/A to any debt owed by a person -
thatis an heir or legatee of a deceased estate, to the extentthat –thedebt is owed to that deceased estate;thedebt is reduced by the deceased estate; andtheamount by which the debt is reduced by the deceasedestate formspart of the property of the deceased estate forEstate Duty Actpurposestothe extent that the debt is reduced by wayof -donationas defined ins 55(1); oranytransaction to whichs 58applies
Para 12A is N/A to any debt owed by a person -
toan employer of that person, to the extent that the debt is reduced inthe circumstancescontemplated inpara 2(h) of the Seventh Schedule;toanother person where that person andthe otherperson arecompanies thatform part of the same group of companies as defined ins 41, unless there is a transaction, operation or scheme entered intoto avoidany taxthatis a company,where -the debtis reduced in the course, or in anticipation, ofliquidation, winding up, deregistration or final termination ofthatcompany; andthe creditor isa connectedpersonCertain conditions apply