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Did you know: The reason you borrow money matters when it comes to qualifying for interest deductions!

by , 05 June 2014
While interest generally qualifies as a deduction, the courts say there are certain principles you must use to determine its deductibility.

One of the important principles you must apply to determine the deductibility of interest is the reason you want to borrow money. In other words, what do you want to use it for?

Continue reading to find out more about this so you don't lose out on interest deductions when you borrow funds.

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The link between the reason you borrow money and interest deductions explained

The real purpose for which you borrow money is crucial.

The Practical Tax Loose Leaf Service explains that in the case of Producer v Commissioner of Taxes (15 SATC 405), a taxpayer borrowed money for the ordinary purposes of his business. He then invested the money in shares, which didn't produce taxable income.

The Loose Leaf Service says this case laid down the following principles:

#1: If you borrow a specific sum of money and use it on something that doesn't produce income and doesn't relate to the income-earning part of your business, you can't deduct the interest you pay on the money as expenditure. This because you didn't use the money in the production of income.

#2: If you have a good enough reason to borrow the money to use in your business, producing income, even if you invest the money in an investment that doesn't produce taxable income, you can still deduct the interest for income tax purposes.

When it comes to interest deductions, remember this golden rule.

Legally pay less tax

139 reasons SARS doesn't want you to see this.

The golden rule for deducting expenses is as follows

In this article, we explain that 'you can deduct any expenditure and loss you incur in the production of income for your business, as long as it's not of a capital nature.'

The bottom line: When you borrow money, think about the reasons you want to use it so you don't miss out on interest deductions.

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