In our previous article with the same heading that appeared during the third quarter of 2016, we discussed the tax proposals as contained in the Draft Taxation Laws Amendment Bill that was published in July 2016 for comment. One of the proposed tax changes was the inclusion of imputed interest in one's income for income tax purposes if you were to make an interest free loan to a trust or not charge sufficient interest on a loan to a trust. In such a case the proposal was that interest at the official rate (eight per cent) were to be included in your taxable income. To make matters worse, the annual exclusion of R100 000 available for donations tax purposes (which is commonly used to reduce or write off a loan account) will not be available. These were just some of the provisions contained in the proposed section 7C (of the Income Tax Act).

After examining public comment received on the draft legislation, Treasury issued a second Draft Taxation Laws Amendment Bill, 2016 on 23 September 2016. In the second draft bill, the idea of imputed interest was dropped and replaced with the new provision that the deemed interest (if no interest is charged or interest at a rate lower than the official rate on a loan to a trust) will be treated as an ongoing donation as from 1 March 2017. The ability to use the annual donation tax exemption to write down the loan to the trust have been made available.

However, the proposed legislation does make provision for certain exemptions, including loans made to Public Benefit Organisation trusts (as defined in the Income Tax Act), Special Trusts (as defined in the Income Tax Act) created for people with a disability (type "A" special trust), loans used for the acquisition of a primary residence in a trust and loans to a trust in terms of a Sharia compliant financing arrangements. 

The proposed legislation will apply on all loans made to a trust before, on or after the date of operation. Therefore all existing and new loans to trust will be subject to this legislation. That being said, whether this is the final draft legislation on this topic remains to be seen as this second draft bill has also attracted its fair share of commentary and criticism. Whether you should still keep your family trust or proceed with creating one will depend on your own personal and financial circumstances. Creating or using a trust purely for tax reasons have never been recommend due to the ease of which tax legislation can be amended – as can be seen clearly from the different draft legislation published the past few months. The main reason when considering to continue with your existing trust or create a new one is for risk-protection purposes. The wise man will rather pay a bit more tax than stand the chance of losing his most valuable assets. Therefore, it is important to keep your holistic estate plan in mind when confronted with the decision of saving tax on the one hand or paying a bit more to the tax man but have the peace of mind that the assets in the trust is safely protected in a trust and discuss your options with your attorney who specialises in the field of holistic estate planning.