Page 63 - Q&A

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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