Specialising in tax and exchange control, Johan spent time with PwC in the UK, the financial capital of the globe, and on his return spent 3 years with PwC Cape Town in the Corporate International Tax department before joining STBB as a candidate attorney in 2011. Johan practices within the Corporate Commercial department and has extensive commercial drafting experience with a specific focus on business acquisitions, going-concern transactions and advises on tax aspects of commercial and property-related transactions. Since 2015 Johan heads the Non-Resident practice within STBB. His expert services range from assisting foreign investors in remitting their proceeds from fixed property out of South Africa and drafting and regularising loan agreements through the SARB to obtaining Tax Directives and various types of Tax Clearance Certificates from SARS. As an admitted attorney, conveyancer and registered tax practitioner, Johan’s skill set makes him an invaluable asset in advising and assisting STBB’s diverse clients.

Law Update | The Proposed Increase in the Official Rate of Interest

The 2018 National Budget revealed a proposed increase in the “official rate of interest” as set out in the Income Tax Act. Increasing the official interest rate increases the individual tax burden, including discouraging low interest loans from employers and creating significant extra tax on loans to trusts.

The official rate of interest is currently 7.50% (repurchase rate plus 100 basis points). The proposed increase would bring the official rate of interest up to 10%, reflecting a tax increase of 33.3%.

A higher “official rate of interest” would also result in:

  • Higher employees’ tax payable by employees receiving low or no-interest loans from their employers;
  • Higher dividends tax payable in relation to low or no-interest loans from a company to its individual shareholders (creating a higher deemed dividend); and
  • Higher donations tax payable in relation to low or no-interest loans from individuals (deemed donation).

The 2018 / 2019 Budget Speech stated that:

“Given that interest rates lower than prime are now uncommon, it is proposed that the official rate be increased to a level closer to the prime rate of interest. This would allow the benefit of lower rates to be measured with reference to a rate that approximates the rate offered by commercial banks to low-risk clients.”

Whilst this may be true for individual borrowing, it isn’t for loans by individuals i.e.: loans to trusts where the interest rate is lower than the official rate. In this case, one has to consider the investment return the individual could otherwise earn, presumably substantially below prime.

The cost of maintaining foreign and local trusts has been rising due to increased focus by tax authorities, compliance complexity and increased reporting obligations. The proposed increase of the official rate further increases this burden. Currently, if the loan to a trust is made in Rands, the effective donations tax is 1.5% of the loan (7.5% of 20% donations tax rate). If the loan is in another currency, the official rate of interest might be as low as 1.5%. Should the official rate of interest be increased as proposed, the effective donations tax will be 2.05% of the loan.

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