Tax season: Strike a balance between the good and the bad

As the end of the tax year approaches, it is always prudent to ensure that your affairs are in order ahead of filing your tax returns later in the year. Equally important is staying informed about recent regulatory tax changes that may affect your farming business, whether positively or negatively.

- Dr Marese Lombard

Changes in trust requirements

From a farming perspective, there have been relatively few significant changes to tax legislation in recent years. However, a number of other amendments may have an impact on certain farming operations. One such more subtle change relates to trusts. Section 25B of the Income Tax Act, 1962 (Act 58 of 1962), as amended, provides that any distributions made by a trust to nonresident beneficiaries, such as individuals who have emigrated from South Africa or entities established abroad, are taxed in the hands of the local trust, rather than in the hands of the nonresident beneficiaries. This may have important tax implications for farming businesses run via trusts, of whom the children or other beneficiaries permanently reside and work overseas. Where a trust has one or more beneficiaries who are regarded as nonresidents for tax purposes, the income is effectively 'held' in the trust and taxed at a flat rate of 45%.

In addition, several amendments in recent years have been made to section 7C of the Income Tax Act, which deals with loan accounts between an individual or company and a trust. Section 7C targets interest-free or low-interest loan accounts, particularly in situations where assets have been transferred from an individual to a trust via such a loan. In essence, this occurs when the purchase price of the asset remains outstanding in the trust and is not repaid to the individual.

Where an interest-free or low-interest loan falls within the ambit of section 7C, the 'interest component' is deemed to be a donation, triggering donations tax at a rate of 20% (and in some cases 25%). While this may have a limited effect where loan account balances are relatively small, it can result in significant cashflow implications for producers with high-value loan accounts.