What is the minimum and maximum rate one can charge for interest on shareholders’ loans?
12 February 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: What is the maximum rate we are allowed to
charge as interest on shareholders’ loans in terms of the Income Tax Act?
Is there a minimum rate
as well? Can we charge no interest?
Is this interest
deductible for tax purposes as the loans were given to purchase properties?
There is no prescribed rate for interest payable to shareholders on shareholder
loans and it could even be at a zero rate.
deductibility of the interest could be disallowed on the basis of being
excessive and interest free loans could have tax implications in certain
instances (please see interpretation note 58 (issue 2)).
There have been various cases of expenses being disallowed for being
excessive. Advertising expenditure has in the past been disallowed partially
for being excessive but these have been in ITC cases and are quite old, though
the principle remains valid (See ITC 621 (1946) 14 SATC 498; ITC 629 (1946) 15
SATC 93). More recently in ITC 12262, 7 Dec 2010 this matter again came up and
the court held, citing authority, in respect of SARS’ attack on excessive
marketing fees as follows at :
"The marketing fees were
not excessive in the generally accepted sense of such term in such matters.
These cases make it clear that it is not for the court (or the Commissioner) to
say, with the benefit of hindsight, that business expenditure should be
disallowed on the basis that it was not strictly necessary, or that it was not
as effective as it could have been. If the purpose of the expenditure was to
produce expenditure, in the course of trade and the expenditure is not of a
capital nature, then that it sufficient.”
In our view this statement better describes the current law in this regard.
As to the deductibility of interest on properties purchased being capital
or revenue, the test for the deduction is its closeness of connection to the
operations of the business (CIR v Genn & Co (Pty) Ltd  3 All SA 382
(AD)) and that interest deductions are not prohibited merely because it was
used to acquired fixed or floating capital (Burgess v CIR  2 All SA 496
Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.