Johan joined STBB in 2013 and works in the Cape Town office where he specialises in tax structuring and commercial drafting.

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.