As it stands, section 7C stipulates that any interest foregone in respect of a low-interest or interest-free loan, advance or credit transferred to a trust, will be a deemed donation and will be subject to donations tax.

Section 7C has been amended multiple times since its introduction to extend its scope of application. For example, in January 2021, section 7C(1B) was inserted to also include preference shares subscribed for by natural persons in companies where a connected person trust is the holder of at least 20% of the company’s equity shares or can exercise 20% of the company’s voting rights. The effect of this amendment was that any dividends that accrued to the holder of the preference shares, will be deemed to be interest in respect of the loan.

The Budget explains that section 7C(5) provides exceptions to the general position, such as where the low-interest or interest-free loan, advance or credit is used to purchase a primary residence for the person advancing that low-interest or interest-free loan, advance or credit to the trust, company or spouse of such person. In practice, what would often happen is for the person to sell their primary residence to the connected person trust or company to contemplated in section 7C, on loan account. In other words, the company or trust becomes owner of the primary residence but owes the purchase price to the seller on loan account.

In the Budget, National Treasury has proposed two clarifications to the primary residence exception in section 7C(5).

Primary residence

The Budget indicates that the exclusion in section 7C(5)(d)(i) of the ITA does not fully encompass what constitutes a “primary residence” in terms of the Eighth Schedule of the ITA. In Paragraph 44 of the Eighth Schedule of the ITA, a primary residence is defined to mean a residence:

• in which a natural person or a special trust holds an interest; and
• which that person or a beneficiary of that special trust or a spouse of that person or beneficiary:
  • ordinarily resides or resided in as his or her main residence; and
  • uses or used mainly for domestic purposes.

The Budget proposes that primary residence exception provision be amended to provide clarity in this regard.

Foreign currency conversion

In the Budget, National Treasury has expressed concern regarding the conversion of the low-interest or interest-free loans, advances or credit which are denominated in foreign currency, as the section does not indicate how and when this amount should be converted to South African rands.

Although the ITA contains provisions providing for the conversion of foreign currency to determine one’s tax liability, such as section 25D of the ITA dealing with the accrual of foreign income and Paragraph 43 of the Eighth Schedule dealing with foreign capital gains, neither section would address the scenario contemplated in the Budget. Practically, section 25D contemplates conversion of foreign income into ZAR based on the spot exchange rate or average exchange rate, depending on the circumstances. It is possible that the proposed amendment to section 7C will also indicate the use of the spot exchange rate or average exchange rate, depending on the circumstances. The Budget indicates that that the conversion would affect the calculation of the deemed donation and one would hope that the amendment would be written in such a way as to prevent currency fluctuations from unfairly increasing the amount of the deemed donation that is subject to tax.