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Warning: You can only claim a tax deduction on interest in this one situation

by , 16 December 2014
Assuming the interest you paid on transactions is tax deductible is a very costly error. Only certain interest qualifies as tax deductable.

If you claim the wrong kind of interest, SARS won't just reject the claim. It will also charge you penalties and interest.

And SARS will pick up on this mistake because its officials know how to tell the difference between deductable and non-deductable interest.

To make sure this doesn't happen to you, I'm going to show you the only situation when you CAN claim interest...

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Here's when you can claim interest as a tax deduction

SARS allow interest as a deduction if it's 'productive'. In other words interest you earn while running your business and making business income.
Here's an example of productive interest:
Interest you paid on a loan you used to finance the purchase of a database you needed for your business activities. SARS will allow this as a deduction.
The Income Tax Act doesn't allow you to deduct interest of mixed purposes expenses, i.e. both business and non-business purposes. So, if you borrow money to buy new laptops, for example, that you use for business and non-business activities, you can't claim interest on it.
But our courts do let you claim this kind of mixed purpose interest in certain cases.
Just be careful.
This doesn't mean you can claim interest on any mixed purpose expenses. If SARS agrees, it will only allow you to claim the business portion of the expense as a tax deduction.
To see what counts as un-productive interest it asks the following two questions:
  1. Why did you borrow the funds?
  2. What did you use the loan for? Did you use the loan for private or business purposes?
In answering these questions, SARS will consider the nature of your trade or business.
But how will SARS find out if you claimed unproductive interest?
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How will SARS find out if you try to claim unproductive interest as a tax deduction?

SARS will carefully look at your capital account and bank statements to determine if your interest expense is productive or unproductive:
You should prepare for a tough battle with SARS if you want to claim a tax deduction! Even if you claim what you see as productive interest, SARS may see it as unproductive.
If SARS see these factors in your capital account, it will see the interest as unproductive:
  • Your capital account has a debit balance;
  • You've suffered losses and made withdrawals in a specific year while your bank overdraft or loans have increased;
  • Your drawings exceed your profits in a specific year and the shortfall was financed by a bank overdraft or loan; and
  • Non-cash items are included in the capital e.g. profits on the disposal of assets, revaluations.
But if you can prove to SARS that the interest is productive, then it will let you claim it. This is the one situation where you can claim interest as a tax deduction without triggering penalties.
You can find out more about productive and unproductive interest in the Practical Tax Loose Leaf Service.

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