Prior to the introduction of section 23K by way of clause 49 of the Taxation Laws Amendment Bill, Bill 19 of 2011 (the "TLAB") whether or not a taxpayer was permitted a deduction in respect of interest expenditure, hinged upon whether or not the expenditure satisfied the requirements in terms of section 11(a), read together with section 23 of the Income Tax Act No. 58 of 1962 (the "Act").
The introduction of section 23K, however, has introduced further requirements that must be satisfied in order for interest expenditure to qualify for a deduction in terms of section 11(a) of the Act and applies only in the context of section 45 (intra-group) and section 47 (liquidation distribution) transactions.
In summary, section 23K disallows a deduction in respect of interest incurred by a taxpayer in respect of any loan granted to the taxpayer where such loan is used directly or indirectly for the purpose of enabling the acquisition of any asset by the taxpayer in terms of an intra-group or liquidation distribution transaction.
For example, section 23K will apply where a taxpayer incurs interest expenditure in respect of loan funding obtained by the taxpayer for the purpose of acquiring shares in a company and thereafter, the assets of the company are transferred to the taxpayer by way of an intra-group or liquidation distribution transaction in terms of section 45 or section 47 of the Act, retrospectively.
The taxpayer may, however, apply to the Commissioner for the South African Revenue Service (the "Commissioner") for a directive that section 23K does not apply in the circumstances thereby permitting a deduction of interest in terms of section 11(a) of the Act. Section 23K specifies the criteria that must be taken into account by the Commissioner for the purposes of considering the application for the directive and the Minister of Finance is furthermore permitted to issue regulations prescribing criteria in this regard.
It is important to note, however, that a directive granted by the Commissioner in terms of section 23K is a directive as to the non-application of the anti-avoidance provisions contained in section 23K. It is not a directive as to the actual deductibility of the interest expenditure in terms of section 11(a) of the Act and therefore, any interest expenditure claimed in respect thereof will still have to satisfy the requirements of section 11(a) of the Act.
Specific rules apply in respect of the timing and application of any directive and in order for any directive issued by the Commissioner in terms of section 23K to be effective from the date of the granting of the loan funding, the application for the directive must be made before 31 December 2011 where the loan was granted before 25 October 2011 or within 60 days of the date of the granting of the loan where the loan was granted after 25 October 2011. Failure to comply with these deadlines will result in the directive being effective from the date of application for the directive thereby reducing the potential interest deduction.
A practical consideration that arises in the context of mining companies, is that a mining company taxpayer incurring interest expenditure for the purpose of acquiring shares in a mining company with the intention of distributing the assets thereof to the mining company taxpayer in terms of a section 47 transaction, is that there will inevitably be a delay between the acquisition of the shares and the distribution of the assets in specie, by virtue of the fact that ministerial approval is required in respect of the transfer of the ownership of any mining rights held by one mining company to another mining company.
The tax implications that arise in such circumstances, therefore, is that the transferee mining company will, for the period from the acquisition of the shares to the liquidation distribution, bear the onus of proving that the expenditure satisfies the requirements of section 11(a), read together with section 23 of the Act. Thereafter, that is, subsequent to the liquidation distribution and assuming that the transferee mining company is of the view that the expenditure qualifies for deduction in terms of section 11(a) of the Act, it will be required to submit an application to the Commissioner for a directive that section 23K does not apply and that the interest expenditure incurred in respect thereof may be deductible in terms of section 11(a) of the Act.
Another practical issue that arises in the context of the above is with regard to the timing of the deductibility of the interest expenditure in terms of section 23K. Section 23K refers to the date upon which the loan is granted in determining when an application for the directive must be submitted. In the circumstances described above, the loan is granted upon the acquisition of the shares, whereas section 23K only finds application upon the declaration of the liquidation distribution which may as evidenced in the example above be sometime after the granting of the loan. Accordingly, in such circumstances, there is a risk that the directive may only be effective from the date of the application thus limiting the extent of the interest deduction permitted in terms of section 11(a).
Furthermore, an Advanced Tax Ruling (ATR) is not available in such circumstances as the Commissioner is not permitted to issue an ATR in respect of applications requiring clarity on "the deductibility, in terms of section 11(a) or section 24J of the Act of any interest incurred by a company on debt used to finance the acquisition of shares in another company for the purpose of acquiring the underlying assets of the business".
It is therefore recommended that taxpayers proceed with caution and plan carefully in circumstances in which section 23K may be applied.
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