On 15 November 2022, the South African Revenue Service ("SARS") announced its intention to withdraw Practice Note No. 31 ("PN31"), which relates to the interest paid on borrowed money proclaimed in the Government Gazette No. 16018 of 14 October 1994. The intended withdrawal will apply for years of assessment commencing on or after 1 March 2023.
In terms of PN31, it is SARS' practice to allow taxpayers a deduction of interest paid in instances where such interest is incurred in the production of interest income on capital or surplus funds invested, where such taxpayer is not a moneylender and does not carry on a trade. In particular, the Practice Note states as follows:
"While it is evident that a person (not being a moneylender) earning interest on capital or surplus funds invested does not carry on a trade and that any expenditure incurred in the production of such interest cannot be allowed as a deduction, it is nevertheless the practice of [Inland Revenue] to allow expenditure incurred in the production of the interest to the extent that it does not exceed such income."
SARS' rationale for withdrawing PN31 is a result of perceived increasing abuse of the concession provided for in PN31 in terms of transactions which maximise the deduction of interest or other expenditure incurred using PN31 whilst there is no corresponding inclusion in gross income for the recipient.
If implemented, the withdrawal may impact taxpayers who rely, inter alia, on the provisions of PN31 when claiming interest deductions.
SARS' intention to withdraw PN31 provides a window for the public to make representation for legislative amendments in their place as part of the Budget 2023 Annexure C process by its deadline of 30 November 2022. SARS also invites comment on the proposed withdrawal by 15 December 2022. Our tax team will be making representations in this regard.
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