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Three instances when you CAN'T claim interest as a deduction

by , 16 January 2014
Tax law says you can claim interest as a deduction in the production of income. BUT, there are three instances when you aren't allowed to do this...

This week, we're focusing on deductions. In this article, we told you about two instances when you CAN claim interest as a deduction.

Now, we're telling you about the three instances where you CAN NOT claim interest as a deduction.

Let's take a look…

Three cases where SARS disallowed the interest claim and what you can learn from them

#1: Financier v COT (17 SATC 34) (SR)

In the case of Financier v COT (17 SATC 34) (SR), the business borrowed money for the general purposes of the business, as opposed to a specific purpose. They used it to acquire an investment that yielded no income.

Ruling: The court found that the portion of the interest paid allocated to the non-productive investment wasn't allowed as a deduction.

#2: CIR v Shapiro (1921 NPD 436) (4 SATC 29)

In the matter of CIR v Shapiro (1921 NPD 436) (4 SATC 29), in terms of an agreement with a company, Shapiro borrowed money to acquire enough shares to qualify for the position of Managing Director (MD).

As the MD, he received a salary, housing allowance and commission. He wanted to deduct interest paid on the loan as an expense incurred in the production of this remuneration.

Ruling: SARS disallowed this and the Court upheld its decision. It ruled that his salary, commission and housing allowance weren't the result of his shareholding in the company, but due to the services rendered by him in his duties as MD, says the Practical Tax Loose Leaf Service.

#3: 54 SATC 261

In this last case, a private company was carrying on business as a steel mill. It had a large loan payable to its holding company. It paid interest of approximately R3.3 million and claimed it as a deduction.

A portion of the interest levied at 29.25% wasn't allowed because it was excessive. SARS argued that a reasonable rate of 22% interest would be acceptable in terms of the Usury Act.

SARS also argued that the expense wasn't exclusively for the purposes of trade, but inspired by another motive.

The company, on the other hand, argued that the interest rate was high due to the high risk nature of the industry and because the loan was an unsecured inter-group loan. The holding company was technically insolvent. The lender also controlled the borrower. Part of the loan was for a dividend declared to the holding company.

Ruling: The Court agreed with SARS in that the excessive interest cannot be allowed.

We'll stress this one again: When it comes to claiming interest as a deduction, the rule is you can ONLY claim the interest you incur for the purposes of your business, and in the production of your business income, as a deduction.

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