When section 7C applies
Most founders fund the structure with a loan rather than a donation, to avoid donations tax up front. Section 7C is the anti-avoidance rule that closes that door: if you lend money to your trust (or to a company in which the trust — alone or together with its beneficiaries, their spouses and their close relatives — holds, directly or indirectly, at least 20% of the equity shares or voting rights) and the trust incurs no interest, or interest below the official rate, the shortfall is treated as a fresh donation every year.
7C Loan, advance or credit granted to trust by connected person (1) This section applies in respect of any loan, advance or credit that — (a) a natural person; or (b) at the instance of a natural person, a company in relation to which that person is a connected person in terms of paragraph (d)(iv) of the definition of connected person, directly or indirectly provides to — (i) a trust in relation to which [that person or company, or a connected person of theirs,] is a connected person; or (ii) a company if at least 20 per cent of — (aa) the equity shares in that company are held, directly or indirectly; or (bb) the voting rights in that company can be exercised, by a trust referred to in paragraph (i) …
Note paragraph (ii): a loan to a company is caught too, wherever at least 20% of its equity shares or voting rights are held, directly or indirectly, by the connected trust — whether alone or together with any beneficiary of the trust, a beneficiary’s spouse, or a relative of either within the second degree. It is a threshold that can be met by those combined holdings, not a majority-control test. Routing money into Newco instead of straight into the trust therefore does not, by itself, escape section 7C — the substance is the same and the subsection reaches it directly.
The deemed donation (s 7C(3))
The mechanism is simple. Each year, section 7C(3) compares the interest the trust actually incurred against the interest it would have incurred at the official rate. The statutory test is incurral, not cash: a genuine, enforceable interest obligation counts even if paid later, while a journal entry with nothing behind it does not. The shortfall is treated as a donation you made to the trust on the last day of that year of assessment.
(3) If a trust or company incurs— (a) no interest in respect of a loan, advance or credit referred to in subsection (1), (1A) or (1B); or (b) interest at a rate lower than the official rate of interest, an amount equal to the difference between the amount incurred by that trust or company during a year of assessment as interest in respect of that loan, advance or credit and the amount that would have been incurred by that trust or company at the official rate of interest must, for purposes of Part V of Chapter II, be treated as a donation made to that trust or company by the person referred to in subsection (1)(a), (1A) or (1B) on the last day of that year of assessment of that trust or company.
Note — The Government Gazette text refers to “the person referred to in subsection (1) (a), (1A) or (B)”; the consolidation’s editorial note suggests this should read “(1B)”, which is what we print above.
Because it is a deemed donation, the donor pays donations tax on it at 20% (25% on cumulative donations above R30 million) — but the donor can first apply the annual donations-tax exemption against it. The annual exemption SARS currently publishes is R150,000 for natural persons (clause 9 of the 2026 Draft Rates Bill, deemed effective 1 March 2026; it was R100,000 up to 28 February 2026, and as at 29 September 2026 we have not located the promulgated amendment — confirm its legislative status and commencement before a transaction is implemented). The exemption is a single amount per donor per year, shared across all that person’s donations — it is not available afresh for each trust or each loan. So a below-official-rate loan does not always mean tax is actually payable, and a donor who has used the exemption elsewhere gets no shelter from it here.
The official rate of interest
The figure that drives the whole calculation is the official rate of interest, defined in section 1(1) as the Reserve Bank repurchase rate plus one percentage point.
“official rate of interest” means— (a) in the case of a debt which is denominated in the currency of the Republic, a rate of interest equal to the South African repurchase rate plus 100 basis points; or (b) in the case of a debt which is denominated in any other currency, a rate of interest that is the equivalent of the South African repurchase rate applicable in that currency plus 100 basis points: Provided that where a new repurchase rate or equivalent rate is determined, the new rate of interest applies for the purposes of this definition from the first day of the month following the date on which that new repurchase rate or equivalent rate came into operation;
The SARB raised the repo rate to 7.25% effective 25 September 2026, so the official rate is 8.25% from 1 October 2026 (8% from 1 June to 30 September 2026, after the repo rate rose to 7% on 29 May 2026). Because the proviso resets the rate from the first day of the month after a repo change, the official rate moves with the SARB cycle — always confirm the current figure against SARS’s published Table 3 and the latest repo announcement before computing the year’s deemed donation.
The term “official rate of interest” is defined in section 1(1) of the Income Tax Act 58 of 1962 … 01.12.2025 — 31.05.2026 — 7.75% … 01.06.2026 — Until change in Repo* rate — 8.00% … * Repurchase (Repo) rate as announced by the Reserve Bank … Note: The official rate of interest is linked to the Repo rate plus one per cent. The official rate is applied from the first day of the month following the date on which that new Repo rate comes into operation.
Note — The increase to 8.00% follows the SARB Monetary Policy Committee raising the repurchase rate by 25 basis points, to 7%, effective 29 May 2026; per the Note above, official rate = repo + 1% = 8%, applied from the first day of the month following the repo change (1 June 2026). This is the June 2026 issue of Table 3, and SARS had not reissued it as at 29 September 2026. The MPC raised the repo rate again, to 7.25%, effective 25 September 2026, so on the same rule the official rate is 8.25% from 1 October 2026 and the 8.00% row runs to 30 September 2026.
So for a trust with a February year-end, the 2026/27 deemed donation on a R6 million interest-free loan is R6,000,000 × [(7.75% × 92/365) + (8% × 122/365) + (8.25% × 151/365)] = R482,424.66, not R495,000 — 92 days to 31 May 2026 at 7.75%, 122 days from 1 June to 30 September 2026 at 8% and 151 days from 1 October at 8.25%. That figure is on the rates known at 29 September 2026 and assumes 8.25% remains unchanged to 28 February 2027 and that the loan balance stays the same for the rest of the year; SARS’s table does not fix the rate in advance, so a further repo change before 28 February 2027 changes it again, as would a repayment. Section 7D requires simple interest calculated daily, worked on the actual balances and periods — a “loan × 8.25%” figure is only a full-year illustration, and a monthly apportionment is only an approximation.
Worked example: the loan that is taxed every year
The 2025 draft note: unpaid distributions can become section 7C loans
On 26 November 2025 SARS published a draft Interpretation Note on section 7C. Its most important message is that an amount the trust vests in a beneficiary but does not pay out can itself become a loan caught by section 7C — if the beneficiary chooses to leave it in the trust. SARS reasons that to “provide” a loan needs a conscious decision, not mere inaction.
To “provide” implies a conscious decision rather than mere acquiescence. … [Where trustees credit a vested amount to a loan account without the beneficiary’s knowledge] it cannot be argued that the beneficiary has directly or indirectly “provided” any loan to the trust … An amount vested by a trust in a beneficiary that is not distributed to that beneficiary will be considered a loan, advance, or credit provided by that beneficiary to the trust, if— the non-distribution results from an election made by that beneficiary, or the beneficiary requests that the amount not be distributed or paid out …
Note — This is a DRAFT note. Public comment closed on 16 January 2026; it is not yet final and reflects SARS's intended approach — track the final version.
The section 7C(5) exclusions
Section 7C does not apply to certain loans. Section 7C(5) lists eight exclusions, (a) to (h). The ones most likely to matter to a family structure are vesting-interest loans, loans to a special trust, and a loan used to fund the founder’s own primary residence held in the structure.
(5) Subsections (2) and (3) do not apply in respect of any amount owing by a trust or company during a year of assessment in respect of a loan, advance or credit referred to in subsection (1) if— (a) that trust or company is a public benefit organisation approved by the Commissioner in terms of section 30 (3) or a small business funding entity approved by the Commissioner in terms of section 30C; (b) that loan, advance or credit was provided to that trust by a person by reason of or in return for a vested interest held by that person in the receipts and accruals and assets of that trust and— … (c) that trust is a special trust as defined in paragraph (a) of the definition of a special trust; (d) that trust or company used that loan, advance or credit wholly or partly for the purposes of funding the acquisition or improvement of an asset and— (i) the natural person referred to in subsection (1) (a) or (b) or the spouse of that person used that asset as a primary residence as contemplated in paragraph (b) of the definition of “primary residence” in paragraph 44 of the Eighth Schedule, where that primary residence and the land on which it is situated (including unconsolidated adjacent land) do not exceed two hectares are together used mainly for domestic or private purposes, throughout the period during that year of assessment during which that trust or company held that asset; and (ii) the amount owed relates to the part of that loan, advance or credit that funded the acquisition or improvement of that asset; (e) that loan, advance or credit constitutes an affected transaction as defined in section 31 (1) to the extent of an adjustment made in terms of section 31 (2); (f) that loan, advance or credit was provided to that trust or company in terms of an arrangement that would have qualified as a sharia compliant financing arrangement as contemplated in section 24JA, had that trust or company been a bank as defined in that section; (g) that loan, advance or credit is subject to the provisions of section 64E (4); or (h) that trust was created solely for purposes of giving effect to an employee share incentive scheme in terms of which— …
Note — The conditions omitted from limb (b), items (i) to (iv), require in short that the beneficiaries hold, in aggregate, only vested interests in all the trust’s receipts, accruals and assets, determined solely in proportion to what each contributed, and not subject to any discretionary power to vary or revoke them. Limb (d) is shown as substituted by s 3(1)(b) of the Taxation Laws Amendment Act 17 of 2023, effective 1 January 2024 for years of assessment commencing on or after that date — that substitution added the reference to an improvement and the two-hectare limit, so those words are current law. (The annexure to SARS’s 2025 draft note on section 7C reproduces the earlier wording; the draft note’s own footnote 61 confirms the 2023 change.) Limb (e) is shown as substituted by s 4(1)(b) of the Taxation Laws Amendment Act 42 of 2024, effective 1 January 2025 for years of assessment commencing on or after that date: an affected transaction is carved out of s 7C only to the extent of a s 31(2) transfer-pricing adjustment, so a cross-border low- or interest-free loan can attract both a s 31(2) adjustment and s 7C donations tax on the residual. Limb (h)’s conditions are summarised below the quote.
Read exclusion (c) precisely. It only reaches a paragraph (a) special trust — a disability trust created (inter vivos or by will) for the benefit of a person with a disability under section 6B, and taxed on the individual sliding scale rather than at the flat trust rates. It does not cover a paragraph (b) testamentary trust for a deceased’s minor relatives. For the difference between these and an ordinary discretionary trust, see the types of trust.
Exclusion (d) is useful where the property in the structure is genuinely the founder’s home, and exclusion (b) where the loan tracks a beneficiary’s own vested contribution. Exclusion (d) borrows the “primary residence” definition in paragraph 44 of the Eighth Schedule — the home must be one the natural person or spouse ordinarily resides in as their main residence.
“primary residence” means a residence— (a) in which a natural person or a special trust holds an interest; and (b) which that person or a beneficiary of that special trust or a spouse of that person or beneficiary— (i) ordinarily resides or resided in as his or her main residence; and (ii) uses or used mainly for domestic purposes;
Read exclusion (d) for what it is: a rule about the loan. It does not give an ordinary trust or a company the primary-residence CGT exclusion (R3 million as SARS publishes it, from clause 16 of the 2026 Draft Rates Bill; promulgated amendment not located — the enacted figure is R2 million) — that exclusion belongs to natural persons and qualifying paragraph (a) special trusts only, so the gain on the home is still taxed in full in the trust or company when it is eventually sold.
Exclusion (e) is the transfer-pricing carve-out. It only bites where the loan is a cross-border “affected transaction” within section 31 — broadly, a non-arm’s-length arrangement between a resident and a connected non-resident (or associated enterprise). Because the 2024 amendment limits the carve-out to the extent of a section 31(2) adjustment, this matters mainly where a founder or beneficiary is non-resident.
31. Taxable income in respect of international transactions to be based on arm’s length principle.—(1) For the purposes of this section— “affected transaction” means any transaction, operation, scheme, agreement or understanding where— (a) that transaction … has been directly or indirectly entered into or effected between or for the benefit of either or both [a resident and a non-resident (or a connected non-resident / controlled foreign company)] … and those persons are connected persons or associated enterprises in relation to one another; and (b) any term or condition of that transaction … is different from any term or condition that would have existed had those persons been independent persons dealing at arm’s length; … (2) Where— (a) any … transaction … constitutes an affected transaction; and (b) any term or condition … (i) is a term or condition contemplated in paragraph (b) of the definition of “affected transaction”; and (ii) results or will result in any tax benefit being derived by a person that is a party to that … transaction …, the taxable income or tax payable by any person … must be calculated as if that … transaction … had been entered into on the terms and conditions that would have existed had those persons been independent persons dealing at arm’s length.
Note — This is the cross-border transfer-pricing rule the s 7C(5)(e) exclusion points to. It is only engaged where one party is a non-resident (or a controlled foreign company / associated enterprise) — a purely domestic founder-to-trust loan is not an “affected transaction”, so exclusion (e) does not help it.
The last three exclusions rarely fit a family structure, but they complete the list. Exclusion (f) covers a loan made under an arrangement that would have been a sharia-compliant financing arrangement under section 24JA had the borrower been a bank. Exclusion (g) covers a loan already caught by section 64E(4) — the dividends-tax rule that treats a company’s low- or no-interest loan to a connected resident shareholder that is not a company (or to a connected person of that shareholder) as a deemed dividend in specie — so that loan is dealt with under dividends tax instead. Exclusion (h) covers a trust created solely to give effect to an employee share incentive scheme, but only where the loan comes from a company to that trust or funds the trust’s purchase of shares in the scheme company or a company in its group, the trust offers the equity instruments only because a person is a full-time employee or a director of a scheme company, and no person who is a connected person to a scheme company under paragraph (d)(iv) of the connected-person definition may participate.
Charging interest at no less than the official rate removes the section 7C shortfall — provided the interest is genuinely incurred and correctly reflected in the loan balance and the accounts. Keep the two regimes apart: section 7C only creates an annual deemed donation on the interest shortfall; it does not itself attribute the trust’s income or capital gains to the lender. Charging the official rate does not, by itself, settle the section 7 attribution rules or the capital-gains attribution rules in paragraphs 68 to 72 of the Eighth Schedule, which have their own conditions and causal link and must be tested separately.
Frequently asked questions
Section 7C of the Income Tax Act 58 of 1962 is an anti-avoidance rule for interest-free and low-interest loans made by a natural person (or by a company acting at that person’s instance) to a connected trust, or to a company in which such a trust — on its own or together with its beneficiaries, their spouses and their close relatives — holds at least 20% of the equity shares or voting rights (a threshold, not a control test). The interest the trust forgoes by not incurring the official rate is treated as a fresh donation to the trust on the last day of each year of assessment — so the loan account is taxed like a slow donations-tax drip.
Usually, yes, where you are a natural person connected to the trust and none of the s 7C(5) exclusions applies. The loan itself is not taxed when you make it, but s 7C(3) treats the interest you give up — the gap between nil (or low) interest and the official rate — as a deemed donation each year. Donations tax at 20% (25% once your cumulative donations pass R30 million) is payable on it, after whatever is left of your annual exemption. That exemption is one amount per donor per year, shared across all your donations — not a fresh amount for each trust or loan — so a small loan may produce no tax at all.
It is the SARB repurchase rate plus 100 basis points. The SARB raised the repo rate to 7.25% effective 25 September 2026, so the official rate is 8.25% from 1 October 2026 (8% from 1 June to 30 September 2026; 7.75% from 1 December 2025 to 31 May 2026). A new repo rate applies from the first day of the month after it comes into operation. SARS Table 3 (June 2026 issue) had not been reissued for the September change as at 29 September 2026 and still shows 8% as applying until the repo rate changes, so check the latest table and repo announcement.
Work out the interest the trust would have incurred at the official rate for each period of the year (s 7D: simple interest calculated daily on the actual balances), then subtract any interest actually incurred — an enforceable obligation, not merely cash paid, and not an empty journal entry. On a R6 million interest-free loan, a full year at 8.25% (the rate from 1 October 2026) is R495,000; for the 2026/27 year (1 March 2026 to 28 February 2027) the rates are 7.75% for the 92 days to 31 May 2026, 8% for the 122 days from 1 June to 30 September 2026 and 8.25% for the 151 days from 1 October, which gives about R482,425 — on the rates known at 29 September 2026 and assuming the balance stays unchanged; a further repo change before 28 February 2027 changes it again. Deduct the annual exemption (R150,000, the SARS-published figure from clause 9 of the 2026 Draft Rates Bill; promulgated amendment not located), to the extent you have not used it on other donations that year, and pay donations tax at 20% on the balance — R69,000 on the full-year illustration, about R66,485 for 2026/27. The amount changes whenever the official rate changes, even if the loan does not.
Section 7C(5) lists eight, (a) to (h). The ones that matter for a family structure are: loans to a public benefit organisation; certain vesting-interest loans; loans to a special trust that is a paragraph (a) disability trust; and a loan used to fund the founder’s own primary residence held in the structure, where the home and its land do not exceed two hectares (a loan exclusion only — it does not give the trust or company the primary-residence CGT exclusion, R3 million as SARS publishes it from clause 16 of the 2026 Draft Rates Bill, R2 million in the enacted Act). The rest cover transfer-pricing adjustments, sharia-compliant financing arrangements (s 24JA), loans already caught by the dividends-tax rule in s 64E(4), and employee share incentive scheme trusts. See the types of trust for what counts as a special trust.
It can. Section 7C(1)(ii) also catches a loan to a company if at least 20% of its equity shares or voting rights are held by a trust connected to you — counting the trust on its own or together with its beneficiaries, their spouses and their close relatives (within the second degree). So routing the loan into Newco instead of straight into the trust does not escape section 7C where that 20% threshold is met — a threshold, not a control test. Section 7C does not apply merely because a shareholder loan is cheap: the lender, connected-person and 20% requirements must all be met.