The prescription of interest-free loans and the tax implications thereof

Abstract

In Trinity Asset Management (Pty) Ltd v Grindstone Investments 132 (Pty) Ltd the court held that debt in terms of a contract would become due on the specified date in terms of the agreement; when there is no specified date, the debt will be due immediately upon conclusion of the contract. The applicable period for the prescription of a debt arising from a loan agreement is three years. In the normal course of business, an interest-free loan is perceived to have no tax consequences for the debtor or the creditor. The reason for this is that even though the debtor becomes the owner of the loan capital, he is under obligation to repay the creditor. When the loan prescribes, the tax implications will differ, resulting in either donations tax, capital gains tax or dividends tax. This dissertation considers the tax implications of prescribed debt in South Africa with specific focus on interest-free loans. In South Africa, interest-free loans form an important commercial part of the economy, commonly found between individuals, companies and trusts as they usually form part of a financing structure. These loans tend to be informal agreements between parties with no specified due date for debt. This can easily result in the extinction of debt, due to prescription, that may give rise to various tax implications.