Section 7C – Deadline looming for the payment of donations tax
The deadline for the payment of donations tax is looming, if affected loans in terms of section 7C of the Income Tax Act, 1962 (“the Act”) have been provided to trusts and companies.
How will I know if I should be concerned about section 7C?
Section 7C of the Act, deals with any loans, advances or credit (“loan/s”) provided by a natural person to a trust or company, or at the instance of a natural person by a company to a trust or to a company.
These provisions are subject to ‘connected persons’ rules. These rules are important in terms of specific anti-avoidance provisions in the Act (such as 7C), which regulate the tax consequences of transactions that are entered into between related parties.
In addition, where a natural person has acquired a claim in respect of a loan made to a trust or a company and certain requirements are met, the legislation will also be applicable.
Some of the legislation referred to above applies as from 1 March 2017 and other parts as from 19 July 2017.
These loans must however, either be interest-free or the rate of interest charged on the loan must be less than the official rate of interest, which is currently 7.75% per annum. The rate was 8% per annum from 1 March 2017 to 31 July 2017.
What are the consequences of section 7C?
Where no interest is levied by the lender in respect of the loan, or where interest is levied at a rate lower than the official rate of interest (as referred to above), the interest forgone by the lender will be treated as a donation. The donation is deemed to have been made by the lender to the trust or the company on the last day of the trust’s year of assessment. The interest that is forgone will be subject to 20% donations tax in the hands of the lender, after taking into account the current annual donations tax exemption of R100 000 (applicable to natural persons), provided that the full exemption is available.
Regardless of whether or not the loan was made by a natural person to a trust or company, or at the instance of a natural person/s, by a company to a trust or to a company, the donations tax is payable by the natural person/s.
Please note that only South African tax residents are liable for donations tax.
Were there any announcements in the 2018 National Budget Speech that could have an impact on section 7C?
The current official rate of interest is 7.75%, being the repo rate plus one percent. This rate may however be amended from time to time; as and when the South African Reserve Bank adjusts the repo rate. According to the Budget Speech, interest rates which are lower than the prime rate are uncommon nowadays and in light of this, it was proposed that the official rate of interest should be increased to a level which is closer to the prime rate. If this proposal becomes legislation in the future, it will have an impact on the donations tax liability pertaining to section 7C and result in a higher donations tax liability.
Are any exemptions applicable in respect of section 7C?
Yes, there are certain exemptions that apply. We suggest that you, together with your tax practitioner or accountant, analyse any loans to determine whether section 7C may be applicable.
When must the donations tax be paid?
Payment must be made to the South African Revenue Service (“SARS”) on or before the end of March 2018. This means that the last business day for payment is Thursday 29 March 2018 at 12:00.
Is there a SARS form that needs to be completed?
Yes. An IT 144 (Declaration by donor / donee) form must be completed and signed by the donor and the donee.
The IT 144 can be downloaded from the SARS website (www.sars.gov.za).
How do I submit the completed IT 144 to SARS?
The original IT 144 must be delivered to your closest SARS branch office. Proof of payment of the donations tax must also be submitted to SARS.
How do I make the payment to SARS if I have a tax practitioner that deals with my personal tax affairs?
We recommend that you contact your tax practitioner, as he/she should assist you with the payment of any donations tax to SARS, as well as provide guidance with regards to the completion of the IT 144 form.
How do I make the payment to SARS if I deal with my own tax affairs and do not use the services of a tax practitioner?
We suggest that you follow the process referred to below in order to pay the donations tax to SARS. The payment of donations tax must be made through SARS eFiling, combined with authorisation by you via your internet banking profile.
How can I register myself on eFiling?
In order to make payment through eFiling, you must be registered as a taxpayer with SARS.
The next step is to register for eFiling on the SARS eFiling website (www.sarsefiling.co.za) or on www.sars.gov.za, where the eFiling “Register Now” icon is displayed.
If you are not registered on eFiling, we urge you to do so well before the due date for the payment of the donations tax. This will ensure that if there are any registration problems, these can be dealt with timeously and still ensure that your donations tax payment is made before the March 2018 deadline.
Is the actual payment made via eFiling?
No. A payment instruction using eFiling is only initiated on eFiling and is subsequently presented to your bank as a payment request, which is subject to authorisation from you as the payer. This is known as a ‘credit push’ payment mechanism. Authorisation will only take place once you have logged in to your internet banking profile and approved the payment.
How do I set up a ‘credit push’?
- Log in to your eFiling profile, either on the eFiling website (www.sarsefiling.co.za) or on the SARS website (sars.gov.za) where the SARS eFiling icon is displayed.
- Click on the ’RETURNS’ tab
- Click on ‘Payments’
- Click on ‘Payment Guide’. This will provide you with the steps that need to be followed as well as how to do the subsequent authorisation thereof via your online banking profile
How do I make the donations tax payment once I am a registered on eFiling and have set up a credit push?
Follow the prompts referred to below:
- Login to your eFiling profile, either on the eFiling website (www.sarsefiling.co.za) or on the SARS website (www.sars.gov.za) where the SARS eFiling icon is displayed.
- Click on the ’RETURNS’ tab
- Click on ’Additional Payments’
- Click on ‘Create Additional Payment’
- Under “Tax Type” click on the drop-down box, scroll down and click on ‘DONATION (DON)’
- Complete the other required details such as ’Taxpayer Name’, ’Tax Reference Number’ and ’Amount’
- Click on ’Make Payment’ if ready to do so. The payment will then have to be authorised by you via your online banking profile.
If I am a trustee on a trust, what is one of the critical action items to bear in mind?
It is important that the trustees minute that the lender (i.e. the natural person) confirms that he/she will be responsible for the section 7C donations tax payment. It must be noted that if the lender fails to pay the donations tax to SARS within the prescribed period, the lender, together with the trust are jointly and severally liable for the donations tax burden. This means that SARS can recover the donations tax from the trust.
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