On 10 October 2016, the South African Revenue Service (SARS) issued a binding private ruling on the donations tax and capital gains tax consequences of the part waiver and reduction of interest rate on a loan granted to an employee trust.
The applicant, an extractive company incorporated and resident in South Africa, operates in the mining industry and holds a precious metals refining licence (the Licence). Pursuant to retaining the Licence, and achieving its Black Economic Empowerment objectives, the applicant established a resident trust for its employees in South Africa.
The applicant issued some of its shares to the trust at market value. The issuance of shares to the trust was financed by the applicant through a loan account on which interest was levied at the official rate of interest. To date, the trust has yet to service the loan, and the outstanding balance on the loan account, together with the capitalised interest, exceed the repayment ability of the trust. Therefore, in order to demonstrate meaningful economic participation, as a prerequisite for retaining the Licence, the applicant intends to waive one third of the loan and reduce the interest rate to 0%.
SARS ruled that:
- the waiver will not be deemed to be a disposal under a donation;
- donations tax will not be levied on the part waiver or the amendment of the loan agreement to reduce the interest rate to 0%; and
- the trust will be required to reduce its expenditure for the shares in the applicant to the extent of the waiver granted.