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.
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 …, directly or indirectly provides to— (i) a trust in relation to which [that person/company or a connected person] is a connected person; or (ii) a company if at least 20 per cent of— (aa) the equity shares … ; or (bb) the voting rights … are held … 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 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.
If a trust or company incurs— (a) no interest in respect of a loan, advance or credit referred to in subsection (1) …; or (b) interest at a rate lower than the official rate of interest, an amount equal to the difference between the amount incurred … as interest … and the amount that would have been incurred … at the official rate of interest must, for purposes of [the donations tax Part] , be treated as a donation made to that trust or company by the [lender] on the last day of that year of assessment …
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 … denominated in the currency of the Republic, a rate of interest equal to the South African repurchase rate plus 100 basis points … Provided that where a new repurchase rate … is determined, the new rate of interest applies … from the first day of the month following the date on which that new repurchase rate … came into operation; …
With the repo rate at 7% (raised on 28 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.
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.
Subsections (2) and (3) do not apply … if— (a) that trust or company is a public benefit organisation …; (b) that loan … was provided to that trust by a person by reason of … a vested interest held by that person … [where beneficiaries hold vested interests in proportion to what they 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 … for … the acquisition or improvement of an asset and … that asset [is used] as a primary residence … [within the limits in para 44 of the Eighth Schedule]; (e) that loan … constitutes an affected transaction as defined in section 31(1) to the extent of an adjustment made in terms of section 31(2); …
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. 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 on 28 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.