Interest-free loans or low-interest loans and estate planning : life after Brummeria
Preston, Margaretha Johanna
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From time to time the court delivers a judgment that has a ripple effect beyond what was expected, resulting in estate planners reconsidering their planning strategies. Such a judgment was the judgment delivered by the Supreme Court of Appeal (SCA) in the case of the Commissioner for the South African Revenue Services v Brummeria Renaissance 2007 6 SA 601 (SCA) (Brummeria case). In this case the interest-free loan and the right to use loan capital free of any interest obligation were under scrutiny. The SCA had to rule on whether or not this right had a determinable value and whether or not this value could be taxable in the hands of the borrower. The SCA ruled that the right under an interest-free loan should be included in the gross income of the borrower. Since estate planning often involves the use of an interest-free loan, as estate planning tool, to remove a growth asset from the estate of a planner, it could not be generally accepted any more that the granting of such loan would not have any tax implications. Although the interest-free loans used in the Brummeria case, did not relate to an estate planning exercise, the ruling resulted in much speculation regarding the future of the interest-free loan as estate planning tool. SARS tried to ease the uncertainty by issuing Interpretation Note 58, but there is still uncertainty to some extent. The focus of this mini-dissertation is to explain when and to what extend the provisions of the Income Tax Act 58 of 1962 (ITA) as well as the Estate Duty Act 45 of 1955 (EDA) will apply to the granting of an interest-free loan as part of an estate planning exercise. The provisions of the gross income definition, sections 7 and 64E, the provisions of donations tax as well as paragraph 12(5) and 12A of the Eighth Schedule to the ITA, were explored. Sections 3(3) and 3(5) of the EDA are discussed with the use of these loans for estate planning in mind. The question whether or not the interest-free loan is still a useful estate planning tool is also answered.
- Law