The general deduction formula is found in section 11 (a) of the Act, which must be read together with section 23. The term interest is not defined in section 1 of the Income Tax Act 58 of 1962 as amended (the Act).
Exempt Interest
The Government exemption
The shares or securities were acquired by the person or company outside the Republic and paid for by that person or company in the currency of a country other than the Republic. Section 10(2)(b) excludes this exemption for a non-resident receiving interest in the form of an annuity.
The General Exemption
A person other than a corporation who has his habitual residence in a neighboring country if he acquired the shares or securities on or after November 1, 1987. As a result, where a non-resident company carries on its business through a branch in the Republic, any interest paid by the branch will not be exempt from normal taxes.
The Deductibility of Expenditure in Terms of the Income Tax Act It has been established in paragraph 1.1 that most deductions are allowed by
Before its amendment in 1992, section 23 (g) prohibited the deduction of expenses that were not wholly and exclusively incurred for the purpose of trade. Because of the non-trading element, the loss suffered was not wholly for the purpose of trading and was therefore not deductible.
Burden of Proof
The situation where the expenditure was incurred partly for the purpose of trade was not taken into account and such expenditure was therefore disallowed (Huxham and Haupt, 2003:69). Arendse et al argue that the current form of § 23 (g) now explicitly provides for apportionment and allows deduction of trading share.
Application of Income Tax Law
As Denning J pointed out in Minister of Pensions v Chennell (1947) 1 KB 250 at 255 and fine, the last event in a series of physical events need not 'cause' the first event. An intermediate event or an external event may be such a powerful cause that it reduces what happened before to a part of the circumstances in which the cause operates."
Summary
In the case of interest, there have been several court cases, where its deduction has been contested for the above criteria.
Introduction
Financier vs COT (17 SATC 34)
CIR vs Allied Building Society (25 SATC 343)
CIR vs Standard Bank of SA Ltd (47 SATC 179)
To decide whether the expenditure was incurred in the production of income, the court had to look at the purpose of the expenditure. Furthermore, the court had to assess the closeness of the connection between the expenditure and revenue operations.
Interest on Loans Raised to Acquire Capital Assets
Interest on Loans Raised to Pay Dividends
It simply enabled the company to distribute its profits, and that is the purpose of this issue.” As the purpose of the expenditure was to enable the company to distribute its profits and not to produce income, the expenditure was not allowable as a deduction. .
Notional Interest
Raising Fees
Summary
Introduction
In ITC 792 (20 SATC 98) the Court held that if the Commissioner disallows part of the interest payable by a company to its shareholders as being excessive and not incurred in the production of income, he imposes tax on the recipient of the full amount received. However, the question to be decided is whether the crediting of dividends/distributions to a shareholder's/member's loan account leads to the conclusion that the purpose of the loan is to enable the company to pay dividends.
Dividends Credited to Loan Accounts Where Interest Declared Deductible
The Williamson Judgement (Unreported Judgement - Cape Special Income Tax Court - 25 January 1994)
The taxpayer objected on the ground that the interest was deductible under Section 11 (a) read with Section 23 (g) of the Income Tax Act. The interest was not an expense of a capital nature and was expended entirely and solely for the benefit of the taxpayer's business activities.
CSARS vs Scribante Construction (Pty) Ltd (62 SATC 443)
This money was held in the banker's call account and was available for the payment of dividends. Since the borrowings were used for the purpose of trade (section 23(g)) and actually produced income directly and indirectly (section 11(a)), the interest paid on the borrowing was deductible in terms of the Income-tax Act".
ITC 1764 (66 SATC 93)
SARS disallowed the deduction on the grounds that the interest had not been incurred in the production of income because the purpose of the loan had been to finance the dividend. The court found that the purpose of the loan was to ensure that funds were available for capital expansion.
Dividends Credited to Loan Accounts Where Interest Not Deductible The facts in the Scribante case (supra) above were not dissimilar to those in the
Ticktin Timbers CC v CIR (61 SATC 399)
The dividends were instead credited to that member's loan account on the books of the closely held company. The obligation for the interest therefore did not arise when his income was generated. That even if the liability for the interest arose in the generation of the appellant's income, the loan served a dual purpose; one of which had no effect on the appellant's trading.
ITC 1466 (52 SATC 25)
34; Although it is a common practice to pay dividends out of funds used by appellant, there is insufficient evidence in this case to satisfy us that the interest in question does not violate section 23(g) of the Act." (Taxpayer. Prior to the declaration of the dividend, the capital used by the appellant was a loan account in favor of the holding company After the dividend of R36 000 was declared, the appellant's position remained essentially unchanged.
Dividend Loan Created on Revaluation of Property in Company It is important to bear in mind the general principles relating to the allowance of
- Commissioner for SA Revenue Service v 121 Castle Street Cape Town CC(63SATC185)
- ITC 1595 (57 SATC 321)
- CIR vs Guiseppe Brollo Properties (Pty) Ltd (56 SATC 47)
- CIR vs Elma Investments CC (58 SATC 295)
The requirement was that the interest must accrue upon the production of the taxpayer's income, and not upon that in which the shares were purchased. In these circumstances, the courts have held that the purpose of the loan was to pay a dividend. This supports the argument that the purpose of the loan may have been to pay a dividend.
Summary
In principle, deduction of the interest is only allowed if the debt owed by the directors can be identified with the company's trading activities. That identification is revealed by the fact that the debt is part of the method of financing the company's income-generating operations. Alternatively, it can initially borrow the money to pay the compensation and retain its liquid capital.
Introduction
ITC 1583 (57 SATC 58)
Case law on this topic emphasizes that expenses are deductible in the production of income if there is a sufficiently close connection between them. expenditure and revenue earning operations bearing in mind the purpose of the expenditure and what it actually affects. The income of the partnership was produced with the capital that already existed. The partnership could not afford to repay that part of the capital contribution from the appellant.
CIR vs Smith (60 SATC 397)
Appellant's arguments against the disallowance of his claim
In the appellant's objection, his accountants state that the company makes a profit from its activities. In the partnership of Mr Smith and Mr Goosen, such funds were repayable on demand. The auditors argued that the above facts show that the expenses were closely related to the partnership's income.
The Commissioner's Arguments
34;When one looks at the operating requirements of the income producer in the present case, one sees that the partnership had all the capital it needed. The fact that the appellant was no longer funding his capital account from his own resources was irrelevant to the partnership's income-producing operations." In this case, however, the agreement between the taxpayer and his partner provided that the capital accounts of the partners would not be permanently would not remain in the partnership.
ITC 1690 (62 SATC 497)
By doing so, the court seeks to ascertain the substance of the transaction and will not be swayed by its form. After examining the respective relationships between the parties, the court found that the transactions did not change them. In the result, the court found that the taxpayer's "manouevre was a mere paper exercise that effected no change"; and the interest expense was disallowed.
Summary
He considers that the real issues involve a determination of whether the interest paid by the taxpayer was incurred in the production of income, namely a part of the partnership profit including income in the form of interest on his capital account. By contrast, they say, the scheme in the Smith case was one in substance as well as form. To be deductible, interest must be incurred in the production of the income and the closeness of the connection between the expense and the income-producing activity must be assessed.
Introduction
Van Dyk and Van Veyeren, the only members of the company, had equal interests with the taxpayer until September 1987. Van Veyeren later became less involved in the management of the company's affairs. The primary goal was to depose Van Veyeren and thus become the sole member of the taxpayers.
ITC 1602 (58 SATC 205)
The subsequent continuation of agricultural activities in close cooperation arose because W relinquished his lease. However, in this case, section 39 of the Close Corporations Act was applied because the taxpayer itself acquired the interest of the four resigning members. Beyond that purpose, what was actually accomplished by the interest expenditure did not go beyond helping W gain control over the taxpayer.
ITC 1604 (58 SATC 263)
Meyerowitz et al believe that the Commissioner's representative made an unusual argument in support of the denial of interest. This argument was essentially that interest constituted a capital expenditure because of its connection with the financing of a share in a closed company. It follows that, in the circumstances of the present case, the interest was not so closely identified with or connected with capital assets as to be considered capital in nature.
ITC 1620 (59 SATC 316)
The decision was based solely on the facts and the appellant's ipse dixit. His representative argued that the shares were capital in the hands of the appellant and that the expenses in connection with the purchase of the shares were capital expenses. However, the commissioner's representative failed to point out where the court erred in its analysis of the facts in the Shapiro case.
ITC 1641 (60 SATC 493)
However, if shares are acquired primarily for the purpose of generating taxable income in economic transactions, for example to obtain security of ownership or to provide services, then the interest is an expense incurred to generate income and is fully deductible. , regardless of whether the taxpayer is an individual or a company. Since the decision Solaglass Finance Co. Pty) Ltd v CIR (53 SATC1) prohibited the apportionment before the amendment of section 23(g), which came into force from January 1993, it followed that the appeal must fail in respect of the year 1992. of assessment because the purpose of the loan in that year of assessment was not entirely for trading purposes. As for the 1993 tax year, 50% of the claimed deduction was allowed as Section 23(g) in its current form provided for such an apportionment.
Summary
There must also be a sufficiently close connection between the payment of interest and the earning of income to allow the deduction of the interest as an expense incurred in the production of the income.
CONCLUSION
- Introduction
- Purpose
- In the Production of Income
- The Acquisition of Shares
- Summary
The taxpayer's purpose in borrowing money is an important factor in determining the deductibility of interest on the loan. It does not matter whether the money borrowed actually produced any part of the income; the problem. The purpose of the expenditure is an extremely important consideration when determining whether the interest is deductible.
