A recently published SARS ruling has practical implications for South Africans with historic offshore trust loan structures.
Binding Private Ruling 430 considers a structure involving a South African discretionary trust, a South African individual and a foreign trust. The South African trust had advanced an interest-free loan to the individual, who had in turn advanced an interest-bearing loan to the foreign trust. The offshore loan had received SARB approval and was advanced at an arm’s-length interest rate.
This left two reciprocal obligations. The individual owed money to the South African trust, while the foreign trust owed money to the individual.
Rather than requiring the foreign trust to repay the individual and the individual then to repay the South African trust, the parties proposed a more efficient solution.
The South African trust would distribute part of its loan claim against the individual to the foreign trust. The foreign trust would then have a claim against the individual equal to the amount that it owed him. The two equal and opposite loan claims could then be extinguished by set-off.
The tax treatment is what makes BPR 430 significant.
SARS accepted that the distribution of the loan claim constituted a “donation, settlement or other disposition” for purposes of section 7(8) of the Income Tax Act and paragraph 72 of the Eighth Schedule. However, neither provision resulted in an attribution of income or capital gain on the particular facts. SARS also ruled that the distribution was exempt from donations tax under section 56(1)(l).
The legislation itself has not changed, and a Binding Private Ruling applies only to the taxpayers who obtained it. What has changed is that we now have a useful indication of how SARS is prepared to treat this type of restructuring on an appropriate set of facts.
For South African families with older offshore trust structures, this has practical consequences. Historic loan accounts between local trusts, individuals and offshore trusts often remain in place long after the original reason for establishing them has fallen away. BPR 430 suggests that, in appropriate circumstances, reciprocal capital loan balances may be simplified without physically moving the same capital through the structure merely to settle the respective debts.
There are important limitations. The ruling does not eliminate historic tax obligations. The individual in BPR 430 had continued to account for accrued interest on the offshore loan under section 24J.
SARS also expressly declined to rule on the application of GAAR and the common-law anti-avoidance doctrine, or on whether the transaction was permissible under South Africa’s exchange-control regulations.
BPR 430 should not be viewed as a general approval to transfer domestic loan claims to offshore trusts. It does, however, provide a basis for families with established offshore structures to revisit their historic loan arrangements.
The question may no longer simply be whether those loans remain compliant, but whether they still need to exist at all.
