Page 63 - Q&A
P. 63

Preference shares drawing attention
            from the Receiver


            October 2020
            The Minister of Finance has recently published proposed amendments to
            section 7C of the Income  Tax  Act 58 of 1962.  The proposed amendments
            to section 7C target not only loan-based solutions, which was the original
            intention of the provision, but also corporate estates that make use of preference
            share structures.                                                   Commercial
            The provisions of section 7C of the Income Tax Act were initially introduced in
            March 2017. The aim of section 7C was, and still is, to curb the advancement of
            interest-free or low interest loans or credit from a person to their trust, whether
            directly or indirectly through a company, under threat of donations tax.

            Essentially, taxpayers are prohibited from transferring wealth to their trusts and
            advancing interest-free or low interest loans to their trusts or companies that are
            controlled by their trusts. This was countered in many ways by taxpayers, with a
            common method being the use of preference shares whereby the loans were
            converted from debt into equity.
            After catching wind of these type of structuring methods, the Minister of Finance
            proposed that the subscription price for preference shares be deemed to
            be a loan  advanced  by the taxpayer  to the affected  company. In  addition,
            any dividends in respect of those preference shares are to be deemed to be
            interest in respect of such a deemed loan. The deeming provision will apply,
            if the natural, or a company at the instance of a natural person, subscribes
            for preference shares in a company if at least 20% of the equity shares in that
            company are held or the voting rights in that company can be exercised
            by a trust that is connected to the subscriber. Falling within the ambit of the
            proposed amendments to section 7C would result in donations tax being
            levied on the difference between the official interest rate and any preferential
            dividend actually received by the subscriber in a financial year.
            The effect of the proposed amendments to section 7C will in its current
            format go beyond curbing the provision of loans to trusts as initially intended.
            Ultimately, corporate estates that include trusts in their structures will no
            longer be able to issue preference shares to persons connected with the trust
            regardless of the legitimacy of the transaction, without potentially facing some
            anti-avoidance challenges.
            The amendments are still under debate and changes are still expected.
            But it would be prudent to be vigilant and proactive to the possible impact
            of the proposed amendments which are proposed to take effect for years of
            assessment on and after 01 January 2021.





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