- Less PAYE collection where an employer grants a zero or low-interest loan to an employee.
- Avoidance of donations tax where a person transfers an asset to a trust in exchange for a zero or low-interest loan.
- Possible avoidance of dividends tax where a company grants a shareholder a zero or low-interest loan.
To counter the tax benefit as a result of the use of zero or low-interest loans, the Income Tax Act contains various anti-avoidance rules that deal with the taxation of the difference created because of these loans. One example is section 7C of the Act, which applies in respect of zero or low interest-free loan advanced to a trust by a connected person of that trust. The official rate of interest is used under this provision to quantify a donation that arises from advancing a zero or low-interest loan to a trust.
Previously, some taxpayers were relying on the in duplum rules to circumvent anti-avoidance rules in the Income Tax Act. These taxpayers rely on the in duplum rules to distort the quantification of the tax benefit derived from a zero or low-interest loan between connected parties on the difference between the amount of interest actually incurred and the amount of interest that would have been incurred at the official rate. These taxpayers claim that if a zero or low-interest loan is advanced and the unpaid interest on that loan (and other costs, in the case of the statutory rule) reaches the amount of the unpaid principal debt, the in duplum rules apply to stop the interest. Consequently, if the in duplum rules apply, then the application of the anti-avoidance rules on the tax benefit on zero or low interest-free loans must also not be applied.
However, section 7D of the Income Tax Act determines that the anti-avoidance rules dealing with zero or low interest-free loans should apply despite the application of either the statutory in duplum rule or the common law in duplum rule. Taxpayers should therefore be cognisant of any interest provisions in agreements, and that anti-avoidance mechanism will receive preference.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).