Abstract
Section 7 of the Income Tax Act (No. 58 of 1962) and Part X of the Eighth Schedule to the Income Tax Act include deeming provisions for income received or accrued to a person as a result of a donation, settlement or other disposition. In the Commissioner for South African Revenue Service v Woulidge, 2002 (2) SA 199 (A) (63 SATC 483) it was confirmed that the non-charging of interest on a loan will be considered a disposition as provided for by the attribution rules. The disposition is, however, limited to the difference between market-related interest and actual interest charged. The South African Revenue Service (SARS) and the courts have left it to the taxpayer to determine and prove how much of the income is attributable to the taxpayer. In 2002, West and Surtees (2002) remarked that the Commissioner should provide affected taxpayers with a comprehensive method that considers the regular features of trusts, which, in his opinion, would be the appropriate application of the limitation principles. However, more than 20 years later, SARS still provides limited clarity. One might argue that clarity was not provided because the issue is no longer relevant and prevalent in practice. However, the fact that SARS introduced section 7C on 1 March 2017, which deals with donations tax on certain low-interest or interest-free loans by connected persons to trusts, leads to the conclusion that the cause of the CSARS v Woulidge court case, namely interest-free loans, is still relevant and on SARS’s radar. However, after many years, there remains uncertainty when applying the limitation principles.
Although West and Surtees (2002) dealt with the different interpretations in their article, they did not demonstrate all the variables identified in the examples, one of which is the carry-forward principle, with which they disagree. However, the principle is still applied in SARS’s latest Comprehensive Guide to Gapital Gains Tax and used in various other sources. Through a literature review of other scholarly material (textbooks, SARS guides and other available research) and a basic case study example, this study illustrates that different views still exist. The researcher also suggests an additional method for low-interest loans.
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The findings of this study prove that even in a basic example, the different methods identified will result in different taxable income for the taxpayers involved. These differences create uncertainty, which is against the fundamental principles of a sound tax system.