Whether finance charges are deductible for income tax purposes is an important consideration when calculating the cost of credit. Historically, SARS has denied borrowers a deduction for the various costs associated with obtaining credit. One such cost is so-called ‘raising fees’, which in general terms constitutes the cost paid for purposes of initializing and procuring a loan.
Back in 1955, the Appellate Division (as it then was) in Commissioner For Inland Revenue v Genn & Co (Pty) Ltd(“Genn”)[1] held that commissions paid, together with interest, constitutes the consideration for the use of money and are deductible on the same terms.
A few years later the Supreme Court of Appeal in CSARS v SA Custodial Services (Pty) Ltd (“SACS”)[2] had to consider whether various fees, including a commitment fee and an initial fee, qualified for deduction as ‘related finance charges’ under the now repealed section 11(bA) of the Income Tax Act, 58 of 1962 (the “ITA”). The Court accepted that these fees constituted related finance charges due to their close connection to obtaining the loans and the furtherance of the project for which the loans were incurred.
However the provisions relating to the deductibility of interest have been amended and developed since the decisions in Genn and SACS. Specifically, section 24J was introduced in order to regulate the timing of the inclusion and deduction of interest. Section 24J defines what constitutes interest and insofar as an amount falls within the ambit of section 24J, its inclusion or deduction is regulated by its provisions.
The relevance of whether raising fees fall within the definition of interest in section 24J, lies in the fact that insofar as such fees do so qualify, they are deductible notwithstanding that they may constitute expenditure of a capital nature. If raising fees do not fall within the definition of interest in section 24J, such fees will only be deductible if they meet the requirements for deduction in section 11(a) as read with section 23(g) of the ITA, requiring that the amount not be of a capital in nature.
Prior to 19 January 2017 the definition of interest for purposes of section 24J comprised ‘any interest or related finance charges’, whilst with effect from 19 January 2017 the term ‘related’ was replaced with ‘similar’.
The Tax Court in Taxpayer A v Commissioner for the South African Revenue Service[3] had to consider whether certain upfront fees (which included raising fees, debt origination fees and structuring fees) paid in relation to a loan constituted interest as defined in section 24J(2) prior to its amendment. The Court held that the upfront fees formed part of the cost of borrowing and therefore constituted related finance charges which were deductible in terms of section 24J(2) of the ITA.
The Court also in an obiter remark noted that the amendment to the definition of interest from including ‘related finance charges’ to ‘similar finance charges’, ‘may be geared towards narrowing the interpretation of this concept’.
On 27 September 2024, the SARS released a draft interpretation note on the meaning of ‘similar finance charges’ in the context of section 24J(1) of the ITA. Although the SARS' views in the interpretation note are not binding it does show their interpretation of the relevant provisions. The SARS’ position adopted in the draft interpretation note is that raising fees are not similar to interest and will therefore not qualify for a deduction under section 24J(2) as raising fees are once-off expenditure for the acquisition of capital as opposed to recurring interest fees for the use of capital.
On 13 January 2025, the Tax Court in Cape Town had the opportunity to consider the arguments proffered by the SARS in their draft interpretation note.[4] The question before the Court was whether raising fees are ‘interest or similar finance charges’ and therefore deductible in terms of section 24J(2) of the ITA. It was common cause that ‘finance charges’ included the raising fees in question. In considering the meaning of ‘similar’ the court adopted the position that it meant some sort of resemblance, rather than an identical relationship and that the resemblance must be relevant. After considering the similarities and differences between the raising fees and interest, the court ultimately found that the raising fees were deductible as ‘similar finance charges’ as they had a close enough proximity or association with interest. The dissimilarities between the raising fees and interest were found not to be relevant.
This Tax Court judgment is good news for borrowers as it provides support for the deduction of raising fees and grounds to object should the SARS disallow the deduction of raising and similar fees in line with their view adopted in their draft interpretation note. It remains to be seen whether SARS will appeal the decision or amend the draft interpretation note.
It must however be kept in mind that the judgment was based on its specific facts and the fees which were the subject matter thereof. Whether any amount is deductible for tax purposes must be determined based on the specific characteristics of such fees and appropriate tax advice.
[1] 20 SATC 113.
[2] [2012] 2 All SA 237 (SCA).
[3] Unreported case nr: IT 25042.
[4] Unreported case number IT 76795.
