SOUTH AFRICA: RECENT TAX COURT CASE DEALS WITH THE DEDUCTIBILITY OF FINANCE CHARGES IN TERMS OF SECTION 24J OF THE INCOME TAX ACT
ITC 25042, a recent Bloemfontein Tax Court case, deals with the deductibility of finance charges including raising fees, debt origination fees and structuring fees in terms of section 24J of the Income Tax Act.
In this case, the taxpayer, which was conducting the business of property investment and property management, had claimed a tax deduction for raising fees, debt origination fees and structuring fees in terms of section 24J. Taxpayers can only claim deductions for these types of finance charges under section 24J because they are likely capital in nature and therefore the general deduction formula set out in section 11(a) does not apply.
The purpose of section 24J is to allow deductions for ‘interest’ as defined in that section. However, this practice has been a controversial issue for many years due to the vague wording used in the definition of ‘interest’.
Unfortunately, this case was further complicated because the Tax Court had to consider whether the finance charges were deductible only in terms of the provisions of section 24J as it read prior to 2016 and the Court’s conclusions would not necessarily apply to the current version of the legislation. Under the ‘old’ definition (which applied in this case), section 24J allowed a deduction for interest on, inter alia, ‘related finance charges’. The term ‘related finance charges’ is not defined in the Income Tax Act, nor has there been any case law bearing particularly on the term in the context of section 24J.
SARS argued that the parties appreciated the difference between the fees, which were payable upfront once the loans were advanced, and the interest payable. In SARS’ view, because the fees and interest were dealt with separately in the agreements, the fees and interest were separate and could not be seen and taken as one and the same thing. The Court disagreed with this argument.
Based on case law precedent, and specifically the 2012 Supreme Court of Appeal judgement of C:SARS v South African Custodial Services 2012 (1) SA 522 (SCA), the Court concluded that the types of fees under question were ‘related finance charges’ and therefore deductible in terms of section 24J. In the Court’s view, the uncontested evidence was that if the fees had not been paid, there could be no talk of any loan, meaning the fees were inextricably linked with the interest.
In what seems to be an attempt to narrow the deduction, in 2016 the definition of ‘interest’ in section 24J was amended. In terms of the amended legislation, a deduction is permitted for interest, including ‘similar finance charges’ (i.e., similar to interest).
SARS had argued that the 2016 Explanatory Memorandum merely clarified the existing policy position that section 24J only applies to finance charges of the same kind or nature as interest. The Court disagreed that the 2016 amendment can be regarded as merely clarifying existing law and stated that in its view, the 2016 Explanatory Memorandum explained the law post the 2016 amendment.
Section 24J, as it currently reads, has probably narrowed the ambit of the deduction due to the use of the word ‘similar’ rather than ‘related’. However, it remains to be seen if a court will interpret these words differently from the 2016 provision and, whether or not, given their nature, some of these charges could be seen to be ‘similar’ to interest.