Has your loan prescribed without you knowing?

Hylton Cameron Hylton Cameron

Do you understand the tax effects of such prescription?

Numerous loans which are payable on demand are provided within groups of companies, to trusts and between family members.

Unfortunately, most parties are not aware that such loans can prescribe after three years.  More importantly, such prescription comes with its own tax consequences and it is vital for individuals and companies to be aware of what the tax implications are.

A recent case and the law

In the fairly recent case of Trinty Asset Management vs Grindstone Investments the issue of prescription was looked at by the Supreme Court of Appeal (SCA).

The facts are fairly simple; Trinty lent funds to Grindstone, and in terms of the written agreement:

“The Loan Capital shall be due and payable to the Lender within 30 days from the date of Lender’s written demand”

The issue was, when did the loan prescribe?

In terms of the Prescription Act, the period of prescription for a debt is three years, and such period commences as soon as the debt is due.

One could be forgiven for thinking that the time for payment would be from the date of demand, or even 30 days later.

In this regard the SCA stated that it was far from clear that the parties intended “demand” to be a condition precedent for the debt to become due.

Per the court, a loan without any specific agreement regarding the time for repayment is, at common law, repayable on demand. The SCA also provided that a debt which is repayable on demand becomes due the moment the money is lent to the debtor.

Further, that while the loan capital was immediately claimable from Grindstone it would only become payable once Grindstone had received written demand, and once the notice period had expired.

What this means is that prescription formally commences as soon as the loan is provided. The court said one must not merge, or conflate, the date when a debt becomes due and that upon which repayment thereof is demanded.

In terms of the facts in the court case of Trinty vs Grindstone, the loan was advanced in February 2008, there was no interruption of prescription and therefore the debt prescribed in February 2011.

The court briefly considered what must be done to postpone the running of prescription. They referred to Prof Max Loubser, who stated that:

“The courts will require a clear indication that the parties’ intended demand to be a condition precedent for the debt to become due, in which case prescription will only begin to run from the date of demand.”

Unfortunately, the court stated that it is not necessary to express itself on whether such comment is correct.

This deals with the first issue, i.e. has the debt prescribed? In the case of Trinty vs Grindstone, the answer is yes.

On the basis that the debt has prescribed, what are the resultant tax consequences?

Donations tax?

If a debt is no longer due, donations tax could be due at 20% of the value of the loan waived/prescribed.

But it is important to remember here, that there are certain exemptions.

Waiver of loans – recoupments/capital gains?

If the loans were used to fund the acquisition of assets or to fund expenses, there could be capital gains tax  on the waiver of the loan, and/or a recoupment on the waiver of such loan. This could potentially result in tax being levied on the value of the loan that has prescribed!

Loans to trusts

As noted in recent articles, from 1 March 2017, there are various possible negative tax issues in regard to loans to trusts. If the loan has prescribed, there is no loan, however this could be worse due to donations tax issues, and / or the waiver of loans mentioned above.

Re-instate the loan?

Some advisors have suggested that if the loan has indeed prescribed, the parties could agree to re-instate such loan. Grant Thornton’s Tax team cautions that, prior to any re-instatement, tax advice should be obtained as such re-instatement could have additional donations tax considerations.


If you have such loans individuals and companies should carefully examine the terms to ascertain whether the loan still exists (prescription can be interrupted in limited scenarios), and if there are any tax issues if the loan has indeed prescribed.

Finally, if you are about to take out a loan that is payable on demand, care should be taken to ascertain if prescription can be delayed, either by the terms of the agreement or by the interruption of prescription.

If neither of the above options are possible the loan should be carefully monitored, in case the claim prescribes, and this results in some unfortunate tax consequences.

For further information or for assistance in understanding the matters pertaining to loans which are payable on demand, please contact Hylton Cameron.