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What is the minimum and maximum rate one can charge for interest on shareholders’ loans?

Thursday, 12 February 2015   (0 Comments)
Posted by: Author: SAIT Technical
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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?

A: There is no prescribed rate for interest payable to shareholders on shareholder loans and it could even be at a zero rate.

However the 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 [17]:

"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 [1955] 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 [1993] 2 All SA 496 (AD)).

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.



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