12 August 2021 Tax & Exchange Control Alert

Draft tax amendment bills published for public comment: Amendments to section 7C of the Income Tax Act

On 5 August 2021, we published an article in which we announced the publication by the National Treasury and the South African Revenue Service (Fiscal Authorities) of the 2021 draft Taxation Laws Amendment Bill (2021 Draft TLAB), and our intention to publish our comments and observations in light of certain of the proposed amendments. In this article, we consider the changes proposed to section 7C of the Income Tax Act 58 of 1962.

Section 7C was introduced with the aim of restricting taxpayers from transferring wealth to trusts by means of interest-free or low interest loans, advances or credit, without being subject to tax. Following various amendments, section 7C applies in respect of interest-free or low interest loans, advances or credit availed by a natural person or by a company (at the instance of a natural person) to a trust or a company that is a connected person in relation to a trust. In addition, section 7C contains an anti-avoidance measure to curb the use of schemes involving preference share funding. Practically, where a loan, advance or credit is made available on an interest-free or low interest basis, section 7C deems the foregone interest as a donation made to the borrower which will be subject to donations tax at a rate of 20%.

The Fiscal Authorities have identified an avoidance scheme that results in interest-free loan arrangements between trusts to evade the application of section 7C. As it currently stands, section 7C does not make provision for the anti-avoidance measures to apply in respect of any loan, advance or credit that a trust provides to another trust.

In the Draft Explanatory Memorandum on the Taxation Laws Amendment Bill, 2021 (Memo), it states that the scheme that the 2021 Draft TLAB aims to address operates in the following steps:

  1. The shares in a foreign company held by a South African family trust (Trust 1) are bought back on loan account, resulting in Trust 1 acquiring a loan claim against the foreign company.
  2. The buy-back amount is used to capitalise new foreign companies held by a trust (Trust 2), which occurs by set-off without the flow of funds into or out of South Africa.
  3. Trust 1 disposes of the loan claim in terms of an interest-free loan account to Trust 2 (which is typically a trust in which the relatives of the founder of Trust 1 are the beneficiaries or the founder).

The result of this scheme is that no donations tax would be levied on the interest-free portion of the loan arrangement between the two trusts, as section 7C does not apply to transactions in which the lender is a trust. The 2021 Draft TLAB therefore proposes that changes be made to the anti-avoidance measures under section 7C to curb the use of these new avoidance schemes and ensure that the anti-avoidance measures apply to any loan, advance or credit that a trust, directly or indirectly, provides to another trust where its beneficiaries or the founder are connected persons in relation to the founder or beneficiaries of the trust that provided the loan, advance or credit.

The proposed amendments are intended to come into operation on 28 July 2021 and apply to any amount owed by a trust in respect of a loan, advance or credit provided to that trust, before, on or after that date.


Considering their proposed retrospective application, the proposed amendments significantly widen the scope and application of section 7C and aim to protect the South African tax base by restricting the implementation of schemes purely aimed at tax avoidance, as well as restricting similar schemes already implemented prior to 28 July 2021. The due date for public comments on the 2021 Draft TLAB is 28 August 2021.

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