Two of the frequent transactions that occur amongst corporate entities, individuals and trusts are either the sale of assets or the advancement of a loan. Whilst these are common form transactions, specific anti-avoidance provisions apply and are typically overlooked.
Sale of asset
When a capital asset is being sold, one must consider the difference in effective tax rates that exist for individuals (18%), companies (21.6%) and trusts (36%). Notwithstanding the purchaser’s identity, the rates are also vitally important. If the capital asset is being sold to a connected person, the purchase consideration must be equal to the market value of the asset. Suppose a capital loss is realised on the disposal of the asset to a connected person. In that case, that capital loss may be “clogged”, meaning that it cannot be set off against other capital gains but instead is only available to be set off on future capital gains between the purchaser and the seller.
Loan accounts
Various anti-avoidance provisions apply concerning loan accounts. In the context of dividends, a deemed dividend will arise where the interest rate charged on a loan between a non-corporate shareholder and its subsidiary falls below the official rate of interest.
Similarly, loans between a trust and a beneficiary of the trust would also trigger adverse tax consequences if the interest charged on the loan falls below the official interest.
Accordingly, where interest-free loans are advanced, the parties need to be aware of the various anti-avoidance legislation to ensure that no adverse tax consequences are imputed on those loans.