The deductibility of interest

The deduction of interest expenditure, for the purpose of calculating the South African taxable income on which normal tax is levied, must satisfy the requirements of the preamble to section 11 and section 11(a) of the Income Tax Act 58 of 1962, read with section 23(g), unless a particular section makes specific provision for its deduction. There appears to be a presumption that if interest expenditure is incurred in the production of income derived from carrying on a trade, it is deductible and we need look no further. This presumption may underlie the 2005 amendment of sub-section (2) of section 24J, which provides that interest is deductible provided it has been incurred “in the production of income” and “for the purposes of trade” (sections 11(a) and 23(g)). This paper discusses the deductibility of interest and, in particular, whether there are circumstances in which interest paid on a loan used to acquire a capital asset could be of a capital nature. The provisions of the Income Tax Act and court decisions relating to the deductibility of interest, as well as opinions expressed by authoritative writers on tax, are subjected to critical analysis. The paper first distinguishes the tests for determining whether an expense has been incurred “in the production of income” and whether the expense is “of a capital nature”. Specific court decisions relating to the deductibility of interest are then analysed. The research considers section 24J of the Act, to determine whether its provisions have settled the debate, and refers briefly to the provisions of section 11(bB), in the context of the research question. The conclusion reached in the research is that there are occasions where the courts appear to have confused the tests for determining whether interest expenditure was incurred “in the production of income” and whether it is “of a capital nature”, in certain instances have also failed to address the question of the capital or revenue nature of the interest expenditure under scrutiny, and that the matter does not appear to be settled that interest incurred on funds used to acquire a capital asset used to produce trade income is automatically deductible