SARS warning for these South Africans

New SARS guidelines mean that interest-free or informal trust loans will now be strictly policed, carrying significant tax consequences for South Africans using trusts.

On 26 November 2025, the South African Revenue Service (SARS) released a draft Interpretation Note (IN) on section 7C of the Income Tax Act, the anti-avoidance provision aimed at interest-free or low-interest loans used to fund trusts.

“The tax authority’s message is clear,” said Tax Consulting SA partner and head of tax legal Darren Britz and tax attorney Anelmari Truter. “There is simply no such thing as an informal, interest-free loan to your trust anymore.”

While the draft IN does not alter the law, it outlines how SARS interprets Section 7C and, importantly, signals how aggressively the authority expects taxpayers to comply.

SARS has invited written comments on the draft IN, which must be submitted by 16 January 2026, Britz and Truter said.

“The use of trusts is nothing new. In practice, we see a growing number of younger South Africans, including entrepreneurs, first-generation wealth creators, crypto investors, and young professionals, who are starting to use trusts,” they said.

They explained that a trust is a smart wealth planning tool and a way to protect assets by keeping future growth out of personal estates, and start building generational wealth early. However, it only works if the structure is funded correctly.

“Failing to do so can trigger unexpected annual donations tax, transfer pricing adjustments, understatement penalties, disputes with SARS, and even downstream estate duty consequences,” they said.

“As more young people begin to accumulate assets earlier in life, whether through small businesses, side hustles, equity compensation, or crypto gains, trusts are increasingly part of the conversation.”

They offer investors continuity, asset protection and, if used correctly, estate planning efficiency, Britz and Truter explained.

“What is often missed is that the tax rules governing trusts are no longer the flexible, easy terrain they used to be. The days of simply setting up a trust and lending it money interest-free, as a connected person, are gone,” they said.

Section 7C of the Income Tax Act

Since its introduction in 2017, section 7C has transformed how trusts may be funded and restricts taxpayers’ ability to transfer wealth to a trust without incurring tax.

“To restrict taxpayers’ ability to transfer wealth to a trust without incurring tax, section 7C was introduced, effective from 1 March 2017,” Britz and Truter said.

It applies to any loan, advance, or credit provided under specific circumstances to a trust by a connected person who must be a South African resident.

The section covers loans made to the trust on or after 1 March 2017, including those made before the effective date.

“SARS has repeatedly amended the provision to close gaps and counter new structures used to bypass the anti-avoidance rules under section 7C, whether the trust is in South Africa or abroad,” Britz and Truter said.

The draft IN reinforces how the law already works. For example, it will apply where someone lends money to their trust and does not charge at least the official rate of interest, which is currently the repo rate plus 1%.

In that case, SARS treats the difference between what was charged and what should have been charged as foregone interest.

“This foregone interest is treated as a deemed donation every year, which can trigger donations tax at 20% unless an exemption applies,” Britz and Truter noted.

“This applies even if the trust is offshore, the loan is advanced through a company you own, or preference shares or indirect funding mechanisms are used.”

A message for taxpayers

According to Britz and Truter, low tax jurisdictions such as Mauritius and the Cayman Islands remain popular locations for establishing offshore trusts.

This is mainly because their tax rates are significantly more favourable than the tax rate applicable to South African trusts.

“With South African trusts taxed at 45%, many younger investors are drawn to offshore structures marketed as tax-efficient wealth vehicles,” Britz and Truter said.

However, SARS has made it clear that Section 7C applies to South African resident taxpayers, even if the trust is situated outside South Africa.

Notably, though, Britz and Truter pointed out that the draft IN remains silent on how section 7C interacts with the transfer pricing principles that apply to cross-border loans.

“At this stage, the lack of guidance leaves uncertainty for taxpayers who fund offshore trusts. It is expected that tax specialists will raise this point in their submissions to SARS, in order to seek greater clarity in future versions of the IN,” they said.

They said the biggest challenge for first-time trust users is that the mistakes are not always obvious. Common examples include:

• Charging the wrong interest rate
• Failing to formalise the loan
• Using a company to fund the trust incorrectly
• Relying on generic offshore trust solutions
• Not documenting exemptions properly

“These errors can trigger a series of non-compliance issues with SARS. For individuals who are only starting to build wealth, these are costly setbacks that can be entirely avoided with proper structuring,” they said.

Britz and Truter said that trusts remain extremely valuable tools for long-term wealth creation. “They offer protection, continuity, and planning flexibility that is hard to replicate elsewhere.”

However, for younger South Africans entering this space for the first time, they said the message from SARS is unmistakable – Section 7C is here to stay, it is broadly interpreted, and the taxman expects full compliance.

Britz and Truter added that a trust can either be a powerful structure or a tax problem, depending on how it is funded.

“If you already have a trust or plan to set one up, it is advised that you consult trust tax experts without delay and ensure you comply with the tax rules properly to avoid stepping into a costly donations tax trap that could follow you for years,” they said.