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Revealed: Five transactions that lead to unproductive interest

by , 25 July 2013
Assuming that interest paid on transactions is tax deductible could be a very costly error. SARS won't let you get away with deducting unproductive interest. Read on to discover the type of transactions that lead to unproductive interest so you won't make a tax deduction on them.

You're not allowed to claim unproductive interest as a deduction and SARS could impose serious penalties for attempting to claim it, says cautions the Practical Tax Loose Leaf Service.

But what exactly is unproductive interest?

Unproductive interest is the interest you pay but aren't allowed to deduct from tax.

It's important that you're aware of transactions that'll result in this so you don't make the mistake of claiming a tax deduction on them.

Which transactions lead to unproductive interest?

If you've taken out a loan for any of the following reasons, you can't claim the interest on the loan as a tax deduction. SARS will see it as unproductive interest!

  1. A loan to cover private expenses, for example, a family vacation;
  2. A loan to buy out one of your business partners, for instance, by buying his shares in the company through which you run your business;
  3. A loan to pay dividends to the company's shareholders;
  4. 4A loan to buy your residential home; or
  5. A loan to buy an investment that yields income that isn't subject to income tax, for example, shares bought as a long-term investment which are currently exempt from income tax.

Remember, you're not a private equity fund. It'll be difficult for you to convince SARS that taking out debt to make investments is part of your business and in the production of income!

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