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How to defend yourself if SARS disallows your deduction

by , 16 January 2014
SARS is very strict when it comes to deductions. It can easily say 'no' when you claim interest as a deduction. Luckily, there's a way around this. Read on to find out how to defend yourself if SARS disallows your deduction.

Did SARS say 'no' to your deduction? If so, do the following to make sure they give you the green light.

Here's what to do when SARS disallows your deduction

It's not always easy to show that interest is productive or unproductive. And the cases we've covered in this article as well as this one may create the impression that all cases involving interest expenditure are clear cut.

But, there are a lot of grey areas. And you bear the onus of proof.

If you don't convince SARS that the deduction you claimed is legitimate, it'll simply disallow your claim.

You'll have to take the necessary steps to prove you incurred the interest expense for business purposes. And that the interest is deductible.

To do this, file an objection or take the matter to the Tax Board or Tax Court. You must show SARS the interest was productive as it was used to buy an asset or finance money used in the production of income, says the Practical Tax Loose Leaf Service .

If you use a different calculation, make sure you explain it to SARS and why you're using it.

You must attach all supporting documents. This includes all the information you use to formulate your own calculation as well as bank statements.

Remember, SARS can't just impose a penalty. To do so, it has to be sure that the reason you claimed the interest expense as a tax deduction is to evade tax.

And you have the right to argue that you're entitled to claim the interest because you incurred the interest for business purposes.

So, when you need to decide if interest expenses are deductible, one of the most important questions is to ask: What did I use the loan for?

Here are four examples of when you can claim interest as a deduction

#1: When you raise finance to buy equipment you use in your manufacturing business. You start using the equipment straight away.

#2: Interest you pay on an overdraft from a bank to help finance your business's working capital requirements.

#3: Shareholders put money into a company to help finance the purchase of new trading stock, and charge interest on their loan accounts.

#4: A shareholder borrows money from the company, as a result a fringe benefit arises as there's no interest on the loan. The fringe benefit is deemed to be interest actually incurred by the company and is deductible.

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