The tax implications for loans from the Trust or to the Trust may come across as a veritable technical nightmare - but following these simple rules will make sure you stay on the right side of the South African Revenue Service (SARS). It's down to whether the Trust owes the Trustee money or if the Trustee owes the Trust.
When a Trustee owes money to the Trust, also known as a "debit loan account", then any dividends garnered from the amount owing need to be declared in the Trustee's personal name.
If the Trustee or the Beneficiary has an interest-bearing loan from the Trust, the loan can be split amongst family members or spouses. This will prevent tax implications. But, if a Trustee transfers money from his/her loan account to that of a descendant - then tax implications will apply. This may, however form part of the Trustee's annual donation of R100 000. The R100 000 donation exemption is written off against total interest.
It is also important to consider that Trustee or Beneficiary loan accounts should be placed in the Family Trust to reduce the risk in personal name.
A credit loan account, where the Trust owes a trustee money, has different rules which apply. The first is that the Trust is required to pay interest on the loan to the Trustee. This rate is the repo rate +1%.
If the interest amount exceeds R100 000, then the Trustee must declare these earnings in their personal name as interest received as part of the person's income.
If the interest amount falls below the R100 000 threshold, then the donation mechanism that is available to Trustees can be used to decrease the loan account.
Decreasing the Credit Loan Account is possible by either using the deemed donation mechanism of 20% or if the Trust has the necessary cash flow, it can pay the Trustee. If the Trust pays this money to the Trustee, it cannot exceed the loan amount. If the payment exceeds that of the loan amount, then the balance will need to be recorded as part of the Trustee's normal income. It is important to note that any funds that are transferred from the Trust to the Trustees or Beneficiaries will have an impact on the loans, and all loan accounts are required to have a life insurance policy attached to them.
A loan that does not bear interest is if a Trustee pays money into a Residential Trust for the purchase of a residential property. There is a strict limitation that this only applies to one residential property where the trustee is required to reside in. Interest on loans for rental or investment properties will apply.
To ensure that your loan accounts within your Trusts are all in order and above board, contact Wealth Masters to gain access to their specialists who will be able to assist you.
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