Revealed: Two ways SARS spots unproductive interest
Unproductive interest is interest you pay on a loan for non-business activities.
You're not allowed to claim the interest on the loan as a tax deduction because it's unproductive interest.
If you do, SARS will put you under the microscope. Here are two ways SARS spots unproductive interest.
The one reason why you can't claim this deduction
Let's say, you buy property and start building an office. With two weeks to go to completion, you take out a loan and buy office equipment. You hit a snag.
Due to unforeseen circumstances, the builders can't complete your offices for another three months. In the meantime you're paying interest on equipment you can't use yet. So you claim the interest as a deduction. This way you can at least get something out of the delay.
The truth is; you can't claim this deduction. This is because you haven't used the equipment to produce income for your business yet. This interest is unproductive interest.
SARS is very strict about this.
In fact, there are two things SARS will carefully analyse to determine if your interest expense is unproductive:
Let's look at each one in more detail.
Your capital account; and
Your bank statements.
SARS will do these two things to determine if your interest expense is unproductive
How to make yourself invisible to SARS
The key to reducing how much tax you pay is staying off SARS' radar.
SARS has conducted R1.8 million audits. They've added 100s of new tax collectors and auditors to their payroll and each one has his own collection targets to meet.
This means two things:
But there are 139 perfectly legal ways for you to make yourself invisible to SARS. Here's how…
If you're not compliant, your chances of an audit this year have just doubled, and
You will pay more in penalties.
#1: Your capital account
The Practical Tax Handbook explains that SARS will look for the following four elements in your bank account to spot unproductive interest:
#2: Your bank statements
If your bank account has a debit balance;
If you've suffered losses and made withdrawals in a specific tax year, but your bank overdraft or loans have increased;
If your drawings exceed your profits in a specific tax year and the shortfall is financed by a bank overdraft or loan; and
If you include non-cash items in the capital, for example, profits on assets you dispose of.
SARS will study your bank statements carefully and might ask you the following questions:
It will help SARS determine if the interest on the money is allowable as a deduction.
What's the purpose of the withdrawal?
What are the dates of the withdrawal?
What amounts are involved?
What are the current interest rates?
What are the balances on the bank account?
Once SARS has these answers, it'll track how you used the money.
If the money you borrow is used for the business, then the interest attached to that loan is productive. But if you borrow money and pay for a holiday, which is a private expense, then even if the loan is in the business's name, SARS won't let your business deduct the interest.
Now that you know how SARS spots unproductive interest, make sure you legally deduct your interest charges without attracting penalties from SARS. Find out how here
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