Dynamic tax environment can create opportunities

Sometimes amendments to the tax legislation, albeit unwittingly, can have favourable results for a taxpayer. As the saying by the inventor, Alexander Graham Bell, goes, ‘when one door closes, another opens’.

An example was the further amendments made in 2018 to s 7C of the Income Tax Act (cheap loans within a trust environment amount to donations liable to the donations tax) so as to include within its ambit indirect loans to a trust through the medium of a company in which the trust holds at least 20% of the shareholding.

The scenario I am referring to is that is in which a primary residence is held by a company, which in turn is owned by a trust. The trust has on-loaned an amount borrowed from a natural person to a company, which, in turn, used the loan to buy a residential property in which the natural person ordinarily resides.

Section 7C(5)(d) in 2017 provided for an exemption, to the extent that a trust used the loan to buy an asset and the natural person making the loan used the asset as a primary residence. Thus a primary residence owned directly by a company (as distinct from a trust) did not qualify for the exemption, since the exemption provided only for direct ownership by a trust.

Courtesy of the 2018 amendment, the wording of s 7C(5)(d) has been amended so as to include company ownership as being exempt in circumstances in which a company uses the loan to fund the acquisition of a primary residence occupied by the original natural person making the loan or the spouse of such a person.

Thus, in my view, to the extent that a loan is used by a company or a trust to buy a primary residence, this exemption now applies.