In the Tax Court judgment of Taxpayer A v Commissioner for the South African Revenue Service IT 25042, the taxpayer wanted a deduction for finance charges under section 24J of the Income Tax Act, 1962 in its income tax return for the 2016 year of assessment. The finance charges were comprised of raising fees, debt origination fees and structuring fees (collectively the “upfront fees”) which emanated from the taxpayer entering into loan agreements for the purposes of their property development and investment business.
The court found that the upfront fees constituted “related finance charges” and therefore “interest” as defined in section 24J as it read at the time. It follows that the taxpayer was entitled to a deduction for the upfront fees in terms of section 24J.
The definition of “interest” in section 24J had been amended with effect from 19 January 2017 to allow for a deduction of the “[…] gross amount of any interest or similar finance charges […]” rather than the “[…]gross amount of any interest or related finance charges…”. [our emphasis]
The reason for the amendment which replaces the word “related” with the word “similar” was set out in the Explanatory Memorandum on the Taxation Laws Amendment Bill, 2016 (the “Explanatory Memorandum”) to clarify the policy position that this section applies to finance charges of the same kind or nature. The exact meaning of the term “same kind or nature” is unknown.
It follows that the finance charge must be similar to interest to fall within the scope of section 24J. The common law meaning of interest has been established as compensation for the use of money ie, money paid for the use of money (credit). Interest as defined in section 24J is wider than the common law concept and the term “similar finance charges” broadens the definition of interest to include finance charges that do not conform to the common law definition of interest but are “similar” to it. The ordinary meaning of the word “similar” is having a resemblance in nature and essential characteristics without being identical.
If regard is to be had to the essential characteristics and nature of interest, it is arguable that it could mean any kind of charge levied irrespective of name or form, on the provision of credit which has the effect of raising the effective compensation for the use of money. The charge may arguably be required to be levied on a similar basis to interest and over the same time period for which interest will be paid. It therefore seems that the term “similar finance charges” has a more restrictive meaning than “related finance charges”.
In the IT 25042 case, the fact that the upfront fees were not linked to the duration of the loans and the fact that the taxpayer was liable to pay VAT on the upfront fees but not on the interest, did not constitute a basis for the court to find that the upfront fees were not “related finance charges”. However, the court may have come to a different conclusion if the amended definition of interest in section 24J was applicable as the nature and essential characteristics of the upfront fees are arguably different from the interest.
The answer to whether finance charges can be said to be “similar” to that of interest and thus form part of the definition of interest in terms of section 24J will require a factual enquiry in each case.
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