The National Credits Act and Trusts

By Ronel du Preez

There seems to be some confusion regarding the consequences of the National Credit Act (NCA), which came into effect on 1 June 2007, and specifically the effect the act has on trusts. Firstly, it is feared that the act will effect whether you qualify for bonds for new properties and also if it will deter refinancing of existing bonds. Secondly, the number of trustees necessary on a trust in order that the provisions of the act will apply.

Section 3 of the Act sets out the purpose for which the act has been created, namely to regulate the conduct of and compliance to certain rules by credit providers. The act promulgates one set of rules for all credit activities. It also aims to make the credit market accessible to all South Africans and specifically ensure the consistent treatment of different credit products and credit providers. Importantly the act undertakes to balance the rights and responsibilities of credit providers and credit consumers, and improve consumer credit information and reporting. Ultimately the act’s purpose is to assess affordability of debt, resolves over indebtedness, where it exists, and if the consumer understands the implications of the credit product.

Section 6 limits the application of the Act when the consumer is a juristic person. This must be read together with the definition of a "juristic person" as per section 1 of the Act. This states:
"juristic person" includes a partnership, association or other body of persons, corporate or unincorporated, or a trust if –

a.there are either 3 or more individual trustees
b.if the trustees is itself a juristic person

The error made by many ‘advisors’ or credit providers is not reading the definition of the “Juristic Person” and insisting that there must be three trustees on a trust in order that the trust falls within the ambit of section 6 of the Act. It is often not necessary (or desired by you) for more than only you and the independent trustee to be trustees on your property investment trust. It is very important that the independent trustee is a juristic person. This is the function served by the Best Trust Company (Pty) Ltd and one of the reasons why it is imperative to have our company as your independent trustee.

So in other words the NCA will assess whether the trust can afford the bond. As your rental income is normally less than the bond repayment it will be very important for the trust to be exempt from the act. Of course your personal credit exposure will still be taken into account as you stand surety for the bonds, this should also not pose a problem if you have all your trusts in place and the flow of funds between them are properly managed. The importance of a specialised trust accountant will come into play here.

Various accountants and property portfolio planners (bond originators) have advised that as long as your exposure is not excessive and the bond is affordable from the surety’s disposable income the act should not pose a hindrance to your investment. The calculation of your ‘disposable income’ is not a straight forward calculation and together with the above mentioned parties you can assess this.

In summary the NCA is not there to prevent property investment but to protect all parties from over indebtedness and/or over exposure. We do not have to fear it with the correct advise and proper structures in place!