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No deduction, loss, allowance or capital loss may be claimed in respect of the
reduction, waiver or other disposal of such a loan, advance or credit by the
lender and will thus have no tax benefit for the lender.

Anti-avoidance provisions for trusts

■■ Various anti-avoidance provisions exist to combat the use of trusts for income
splitting and tax avoidance schemes, including the deemed donation tax to
be levied on interest-free or low interest loans to trusts.

■■ Income splitting occurs where the marginal rate of tax is reduced to an
amount less than if the income had been taxed from one source.

■■ Section 103(2) of the Income Tax Act includes trusts – and prevents the
utilisation of any loss in a trust, solely for the purposes of avoiding tax.

■■ The Section 7 deeming provisions of the Income Tax Act work mainly on the
basis whereby any income earned by the trust as a result of a donation,
settlement, or other disposition made by a person (“the donor”) which is
not distributed, is deemed to be the income of that donor and taxed in their
hands. If income is distributed to beneficiaries who are minor children of the
donor, the income is also taxed in the hands of the donor. Similar provisions
exist in respect of capital gains made by or accrued to a trust.

Section 3(3)(d) of Estate Duty Act

■■ Where an asset is transferred to a trust during an estate planner’s lifetime,
yet the estate planner, as trustee of the trust retains such power as would
allow him to dispose of the trust asset(s) unilaterally for his own or his
beneficiaries benefit during his lifetime, then Section 3(3)(d) of the Estate
Duty Act may come into play. Such asset(s) may be deemed to be property
of the estate planner and included in his estate for estate duty purposes.

■■ The way in which the trust deed is drafted is important, and also the way in
which the trust and the trust assets are administered. One trustee should not
be allowed to do as he or she pleases in regard to the trust assets.

■■ It is advisable to appoint at least three trustees, one of whom is completely
independent, to act as such so that the estate planner (who may be a trustee
and a beneficiary) will have a minority vote.

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