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More on s 7C of the Income Tax Act

Effective as from 1 March 2017, s 7C of the Income Tax Act subjects to an annual donations tax an interest-free or low-interest loan to a resident trust (167, 168 TSH 2017; see also the Monthly Notebook in this issue). An exemption is provided by s 7C(5)(d), in circumstances in which the loan is applied by the trustees for purposes of funding the acquisition of a ‘primary residence’.

Would a soft loan applied to improve a primary residence, for example, by way of alterations, qualify for the s 7C(5)(d) exemption? And what about the acquisition of land to build a primary residence?

Acquisition v improvements
On a strict, literal interpretation, the wording of s 7C(5)(d) is clear, in that it refers to ‘funding the acquisition’, implying a limitation on post-acquisition improvements, with the result that loans funding such improvements would not qualify for the exemption. In fact, I agree with Costa Divaris when he says that a direct, causal link is required between the ‘funding’ and the ‘acquisition’:

  • The relevant Explanatory Memorandum provides no further guidance, since it merely states that: ‘A loan made by or at the instance of a natural person to a trust will be excluded to the extent to which that loan was used by that trust to fund the acquisition of a residence that is used by that person or that person’s spouse as a primary residence.’
  • As for the inevitable numerical cross-reference by s 7C(5)(d), to para (b) of the definition of ‘primary residence’ in para 44 of the Eighth Schedule to the act, this adds no elucidation to the meaning of the exemption.
  • Nor does the juxtaposition of this exemption with the other exemptions listed in s 7C(5) offer any clues about the intention behind the exemption, other than the obvious intention to exempt ‘acquisition funding’. Each exemption is clearly a ‘stand-alone’.

In my view, a pre-occupation loan also does not qualify for the exemption, since s 7(5)(d)(i) requires that the lender or spouse use the asset (primary residence) ‘as a primary residence…throughout that year of assessment’. It follows that the purchase of land on which a primary residence is to be built will not qualify for the exemption until the year that the building is completed and occupied, for a full year of assessment, by the lender or spouse.

Having regard to a purposive approach, rather than a strict literal interpretation, Costa and I cannot discern any distinction between the acquisition and the improvement of a primary residence, since the two are often closely associated in practice. So it might make sense to lobby for an appropriate extension of the exemption, in a future amendment to legislation, to include the funding of improvements.