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Tax deductibility of raising fees · Tax Break: South African tax for professionals

• 0:11
  Welcome and thank you for joining me for Tax Break.
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  This is a podcast about South African tax, 4 South African tax
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  professionals and practitioners. My name is Peter Flanagan and in
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  each episode, Ashley, my thoughts with you on a topic or
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  a recent development in South African decks.
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  And I tried to keep the episode short enough that you can listen
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  to them whenever you've got a few minutes to spare.
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  In this episode, I'm looking at the case dealing with the income
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  tax treatment of raising fees incurred by taxpayers.
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  So in other words, the expense side where the borrower in, in
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  the context of a loan incurs these raising fees.
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  And the specific case that I'm looking at is a Tax Court case.
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  So it may well still go on appeal.
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  It's something to look out for. And it's only this, it's
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  described as the tax payer trust case.
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  So remember in the in the tax code, the judgment doesn't give
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  the name of the actual tax payer.
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  It's only when it goes in, when the dispute is served by the
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  higher courts, right? So the tax payer in this case
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  included raising fees relating to debts that are used for
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  property development. Important.
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  These rising fees were incurred after 2018 and you'll see why
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  this is important just now. The raising fees were calculated
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  as 2% of the loan capital. It was payable upfront before
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  the loans were drawn down and they were paid to an agent to
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  arrange the loan. The tax payer deducted the
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  rising fees under Section 24 J. So I think at this point we can
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  perhaps just pause to to briefly look at what Section 24 J says.
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  So Section 24 J remember is a section that deals with the
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  deductibility of interest specifically, amongst others.
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  The deductibility of interest, specifically Section 24J2
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  specifies that you can deduct interest on the basis set out in
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  Section 24J if the interest is incurred for purposes of a
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  taxpayer's trade and in the production of its of its income.
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  There's no capital requirement there now. 24 Jay then applies
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  to interest and interest is a term that's defined in Section
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  24 J. Now there's definition is quite,
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  quite broad, but it includes interest or similar finance
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  charges. So the tax payer considered
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  raising fees to be similar finance charges and on that
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  basis deducted the raising fees under Section 24J SASH argued
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  that these rising fees were not similar finance charges,
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  therefore they did not fall under Section 24.
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  Jay. And you had to consider the
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  deductibility under Section 11A and if you went back to 11 A,
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  that does have a requirement to consider whether the
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  expenditures of a capital nature and such consider these expenses
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  to be capital in nature. So as you can see, there's quite
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  a big difference in the outcomes whether you apply 24 J or 11/8
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  to these raising fees. Now before we go to the to the
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  judgment and the court's reasoning, I think there's a bit
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  of context and history that one needs to understand.
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  So back in 2011, there was the Supreme Court of Appeal case,
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  the South African Custodial Services case that considered a
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  few things which included the application of Section 11BA.
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  Now Section 11BA dealt with interest including relating
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  related finance charges and the judge in that case concluded
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  that a list of costs which included raising fees were
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  related finance charges because of their closeness to obtaining
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  the loans at the time. Section 24 J had similar wording
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  in its definition of interest, so it also related it also
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  included related finance charges and in a in a Tax Court case in
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  2022, the court reached the same conclusion as the custodial
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  services case in the context of section 24 J Important this was
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  in the context of 24 giant raising fees before the
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  amendment of section 24 J. So then in 2016, Section 24 J
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  was amended to no longer refer to related finance charges but
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  to similar finance charges. So in the tax payer trust case,
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  the quartet essentially determined what whether the
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  rising fees were then similar finance charges do to interest.
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  So that was really the crux of the question that the that the
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  court had to consider. Now in, in, in reaching its
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  conclusion, the court looked at a few things and I'd like to
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  highlight a few of them. Perhaps the first one is that
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  the definition talks about interest or similar finance
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  charges. And the judge said that the fact
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  that there's an all between these terms suggests that we're
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  looking at alternatives. So what we're looking at when
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  we're looking at similar finance charges is something that is not
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  interest, it's something, it's an alternative to interest, it's
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  something else. The court also considered the
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  dictionary definition and found that finance charges is defined
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  widely enough to include raising fees.
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  So the question of interpretation therefore really
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  centered around whether these finance charges are similar to
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  interest. But the good thing did was they
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  it it identified some case law where the term similar was
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  described as having a resemblance in respect in some
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  relevant respects. And the judge's reasoning was in
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  applying this was to say that other resemblances that we can
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  see between rising fees and interest or or the the the
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  differences between these two things, what are which of these
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  resemblances or differences are relevant and what not.
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  So Sasha argued that the raising fees to be similar must have all
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  the fundamental characteristics of common law of the common law
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  interest meaning. So in other words, it must be
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  for the use of of money. But the judge then indicated
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  that Sash actually conflated the the word same and similar.
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  So the court considered whether the fact that the timing of the
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  raising fees different from interest, the fact that this was
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  necessary to draw them down the loan.
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  Whereas the loan is once it's drawn down, the money is being
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  used. The lack of reference to time
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  value of money and the fact that the payment was made to arrange
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  the loan, not necessarily use the money.
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  Whether these are dissimilarities that could then
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  cause the the the the the rising fee not to be similar.
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  And then in respect of all of these things, the court found
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  that they are not relevant the similarities.
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  So what the court concluded was that despite all these
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  differences, if it wasn't for the rising fee, there wouldn't
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  be alone. So this is part and parcel
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  parcel of the compensation for the loan.
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  In this case, the court concluded that the rising fee
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  was in fact a charge, a finance charge similar to interest on
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  the on the basis of the what it considered the the the relevant
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  resemblances. Perhaps interesting to to notice
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  what the court did not consider and that's the explanatory
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  memorandum to the 2016 amendments where the Treasury
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  described the the reason for replacing the word related with
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  the word similar as to clarify the policy position that applies
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  to finance charges of the same kind or nature.
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  So I don't know if there's really much in it and if it
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  really add much to the to the do do the debate.
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  But the word same year could maybe suggest that what the
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  intention was actually was to say that something should be the
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  same as interest, although that's not what the the wording
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  says it in the law. It talks about similar, not
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  same. So in conclusion, I think we can
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  now say we've got a case dealing with the interpretation of the
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  phrase similar finance charges in the context of Section 24 J.
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  It is only a Tax Court case and I think it might well go on
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  appeal. So if you are affected by this
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  or your clients are affected, I think it is a space to, to, to,
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  to watch out for some developments.
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  That's it for today's episode. If you've got any questions,
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  comments, ideas for future episodes, please send me an
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  e-mail. My e-mail address is in the show
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  notes. If you like the podcast, please
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  go and subscribe for the podcast on your favourite platform.
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  And of course, tell all your friends and colleagues about it.
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  Just as always, the podcast is not intended to be tax advice.
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  It's for information purposes only.
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  Until next time, goodbye.