SARS expands and refines its attack on low- or no-interest loans: section 7C and the “in duplum” rule


By Rob Hare, Senior Associate, Tax, Bowmans

One of the major developments arising from the 2016 tax laws amendment cycle was the introduction of an anti-avoidance measure, section 7C of the Income Tax Act, which attacks tax-free transfers to trusts using low- or no-interest loans.

Section 7C came into effect on 1 March 2017, and applies to any amount owed by a trust in respect of a loan, or any “advance” or “credit”, provided to that trust before, on or after that date.  In other words, the provision will have partial retrospective effect, capturing loans granted before 1 March 2017, but only triggering deemed donations on foregone interest payments after that date.

Broadly, section 7C applies to low-interest or no-interest loans made to a trust by a natural person or a company that is “connected” to that natural person, where this is a related party transaction (with a broad definition).  The provision treats the difference between the interest actually charged and a prescribed “official rate of interest”, currently 8% for local debt, as a donation made to the trust by the natural person.  This deemed donation would then be subject to dividends tax at a rate of 20% in the hands of the natural person.

When it was announced, section 7C was derided by many tax practitioners as a blunt instrument with many flaws. Unfortunately, its appearance in the 2017 Budget Speech materials confirms that it is here to stay. Certain amendments have been proposed to tighten its grip, but also provide some relief to taxpayers.

However, other measures have also been proposed to further expand SARS’ attack on low- or no-interest loans.

Section 7C: expanded scope

It is proposed that section 7C should also apply to low- or no-interest loans made to companies owned by trusts, to combat one of the most obvious gaps in the new provision.  However, it should be anticipated that it will be a real challenge to draft this amendment in such a way that it is actually effective, without inadvertently pulling in multiple unintended “targets”.   We await the draft legislation with some caution, in this respect.

Section 7C: tax relief

It is proposed that the exclusions under section 7C be expanded to exclude trusts that are not used for estate planning, for example, certain trading trusts or employee share scheme trusts.   This proposal is welcomed but, again, the draft legislation is awaited in order to gain a proper insight into the relief envisioned by SARS.

A new target: the in duplum rule

The in duplum rule is a well-established rule that is intended to protect debtors by limiting the total amount of interest that a creditor can charge.  The rule provides that interest on a debt will stop accumulating where the total amount of that interest equals the amount of the principal debt that is still outstanding. Unfortunately, however, there is some case law precedent that this rule does not apply against SARS.

Treasury and SARS are concerned that this rule gives taxpayers the ability to limit the tax benefit calculated as being derived from low- or no-interest loans.  Accordingly, it is proposed that the tax rules dealing with low- or no-interest loans, such as section 7C, be amended to explicitly exclude the application of the in duplum rule.

This proposal may have unintended consequences.  For example, it may result in an anomalous situation where the tax treatment of the low- or no-interest loan would then be more punitive than actually charging and donating the interest amount (because in the scenario where interest is “actually charged”, the in duplum rule would apply). Treasury and SARS will therefore need to carefully consider these sorts of scenarios before this proposal is implemented.


Treasury’s focus on wealth transfers to trusts is reducing the scope for tax planning, and this year’s legislative changes will continue on this path.  There is also a real risk that the proposals to extend the application of the anti-avoidance rules will result in punitive tax treatment for unintended “targets”.

While some relief from section 7C, for trusts unrelated to estate planning, is welcomed in principle, it remains to be seen whether Treasury’s planned amendments will give taxpayers any genuine cause for celebration.