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 your trust controls) and charge no interest, or interest below the official rate, the interest you gave up 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 — The in-force section is headed “Loan, advance or credit granted to a trust by a connected person”; the subsection text quoted here (as reproduced in SARS’s 26 November 2025 draft Interpretation Note, Annexure A) reads “any loan”, and the regime applies equally to an advance or credit.
Note paragraph (ii): a loan to a company is caught too, wherever at least 20% of its equity shares or voting rights are held by the connected trust. 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 paid against the interest it would have paid at the official rate. 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 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.
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 is R150,000 for natural persons (announced in the 2026 Budget, subject to Parliament’s legislative process; it was R100,000 up to 28 February 2026).
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;
With the repo rate at 7% (effective 29 May 2026), the official rate is 8% from 1 June 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 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).
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. The exclusions 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 … [the beneficiaries hold, in aggregate, a vested interest determined solely in proportion to what each contributed] …; (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 … ; (e) that loan, advance or credit constitutes an affected transaction as defined in section 31(1) that is subject to the provisions of that section; …
Note — Exclusion (e) was narrowed with effect from 1 January 2025 (s 4(1)(b) of the Taxation Laws Amendment Act 42 of 2024): an affected transaction is now 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.
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;
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.
Charging interest at the official rate also removes the gratuitous element entirely — but watch that this interacts with the section 7 attribution rules, which an interest-free loan can re-introduce.
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 to a trust (or to a company that trust controls). The interest you forgo by not charging 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.
Yes. 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. You then pay donations tax at 20% on it, after your annual exemption.
It is the SARB repurchase rate plus 100 basis points. With the repo rate at 7% (raised effective 29 May 2026), the official rate is 8% from 1 June 2026. A new repo rate applies from the first day of the month after it comes into operation, so confirm the current figure against SARS Table 3.
Multiply the outstanding loan by the official rate, then subtract any interest actually paid. On a R6 million interest-free loan at 8% that is R480,000. Deduct the annual exemption (R150,000, announced in the 2026 Budget), leaving R330,000, and pay donations tax at 20% — R66,000 every year the loan stays at that level.
Section 7C(5) lists them. 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. 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. So routing the loan into Newco instead of straight into the trust does not escape section 7C where the trust controls Newco.