The Cape Town Tax Court has confirmed that raising fees are included as ‘interest or similar finance charges’ and are therefore tax deductible.

In decision IT 76795, ‘Taxpayer Trust v Commissioner for the South African Revenue Service’, the Cape Town Tax Court held that raising fees are ‘interest or similar finance charges’ in terms of 11(x) read with section 24J (1) of Income Tax Act 1962.

The Court, in examining 24J (1) and other relevant provisions, relied upon an open-minded, grammatical and contextual interpretation. Adopting this approach, the Cape Town Tax Court held:

• Interest must be defined broader in this context, than in the common law or normal sense, as the term is inclusive of ‘similar finance charges’. The use of ‘includes’ broadens the definition of interest within the section. Furthermore, interest here includes “hybrid interest” as it is read with reference to 8FA (1). Therefore, interest in this case, is not necessarily determined with reference to the time value of money and can include “compensation in exchange for the provision of credit”.
• The interpretation relies upon the understanding of ‘similar’. Similarity in this case must be ‘related’ rather than being conflated with “sameness” or “identical”. Similar cannot mean ‘strictly comparable’ but rather reflects the notion of “relevant resemblance”.
• Raising fees, in opposition to SARS’ position, constitute interest because although they are paid before the taxpayer would receive the benefit, they are part of the compensation of the loan, as without the payment of the raising fees, there would be no loan. This speaks to the broader definition of interest identified above. This decision benefits the taxpayer, as raising fees are tax deductible, given that they fall under the definition of ‘interest or similar finance charges’, in terms of section 11 (x) read with section 24J (1) and (2). However, SARS may appeal this decision.

This decision benefits the taxpayer, as raising fees are tax deductible, given that they fall under the definition of ‘interest or similar finance charges’, in terms of section 11 (x) read with section 24J (1) and (2). However, SARS may appeal this decision.