The Cape Town Tax Court recently delivered a judgment (IT 76795) regarding whether ‘raising fees’ constitutes ‘interest or similar finance charges’ as envisaged in paragraph (a) of the definition of ‘interest’ in section 24J(1) of the Income Tax Act 1962 (Act).
The Facts
The Taxpayer had purchased properties that were financed by loans. Over the years, the Taxpayer had refinanced these loans and incurred raising fees. The raising fees were 2% of the capital raised and were a condition for drawing down the loans. The Court, having regard to statutory interpretation principles, found in favour of the Taxpayer that these raising fees were deductible as ‘interest or similar finance charges’.
The finding is contrary to the view of the South African Revenue Service (SARS). During 2016, paragraph (a) of the definition of interest was amended from referring to ‘interest or related finance charges’ to ‘interest or similar finance charges’ to reinforce SARS’ narrow view as to which finance-related fees constitute ‘interest’ for purposes of section 24J.
During 2024, SARS also released a draft Interpretation Note that expressly states that a raising fee that is paid to obtain funds is fundamentally distinct from interest and will thus not qualify for a deduction under section 24J(2). This is also the interpretation that SARS, in our experience, applies in practice.
The Findings
In IT 76795, the Court held that section 24J(1) provides for an expanded definition of interest, as generally understood, where it provides that ‘interest’ for the purposes of section 24J includes ‘interest or similar finance charges’.
The Court, agreeing with other dicta, held that the use of ‘includes’ enlarges and/ or broadens the definition of interest for purposes of section 24J. Further, the Court held that the term ‘similar’ ‘and its various iterations connotates resemblance of some sort’, but that ‘similar’ must not be conflated with ‘sameness’ or the phrase ‘identical to’.
Further, the Court held that ‘interest’ for purposes of section 24J is not only interest determined with reference to the time value of money, but also includes compensation in exchange for the provision of credit. Therefore, a once-off lump sum payment based on a percentage of the value of the finance, without regard to the period of the loan, may not be closely associated with the time value of money, but that does not make it dissimilar to interest for purposes of section 24J.
SARS argued, inter alia, that the raising fees were incurred before the loans became effective and were not compensation for the use of the loans. The Court rejected these arguments, stating that the timing of the fees does not change their nature and that the fees are part of the compensation for the loan.
Further, SARS argued that the raising fees were consideration for arranging the loans and not use of the loan. However, the Court also rejected this argument and held that while the raising fees constitute consideration for the arrangement of the loan, without the payment of the raising fees there would be no loan. This underlines the close proximity between the raising fees and the loans and is indicative of the similarity between the two.
Conclusion
While the Tax Court finding is positive for taxpayers, it is anticipated (but not yet confirmed) that SARS will appeal. Before adopting a position, taxpayers are cautioned to take into account that the judgment does not accord with SARS’ interpretation and that a deduction of raising fees is very likely to be disallowed by SARS.
