A client has a property which he lets to supplement his income. The property has a mortgage bond. If the client draws a lump sum from this bond to use as a deposit on a 2nd property which he intends letting as well, will SARS allow the interest on the 1st
Important:
This answer is based on tax law year ending 28 February 2019.
Answer:
The law relevant to your request is found in section 24J(2) – see section 24J(12), and section 23(g), of the Income Tax Act.
You must consider the following in giving the opinion to the client:
In terms of section 24J(2) a person (the taxpayer) will be entitled to make a deduction of the interest incurred “from the income of that person derived from carrying on any trade, if that amount is incurred in the production of the income.”
From the facts provided, the taxpayer is carrying on a trade – in terms of the definition of trade, in section 1(1) of the Act, it specifically includes “… the letting of any property …”
Judge Nicholas, in CIR v Giuseppe Brollo Properties (Pty) Ltd (1993), said that in “a case concerning the deductibility or otherwise of interest payable on money borrowed, the enquiry relates primarily to the purpose for which the money was borrowed. Where a taxpayer's purpose in borrowing money upon which it pays interest is to obtain the means of earning income, the interest paid on the money so borrowed is prima facie an expenditure incurred in the production of income.” This was in respect of section 11(a), but we submit that the same principle applies as far as section 24J(2) is concerned.
Judge Heher, in CSARS v Scribante Construction (Pty) Ltd 2002, linked the interest paid to the income – the judge said, in that instance that there was a “sufficiently close link between the expenditure and the income earning operations having regard to the purpose of the expenditure and what it actually effects …”
We submit that for purposes of section 23(g), that requires the “moneys, claimed as a deduction from income derived from trade” to have been “laid out or expended for the purposes of trade”, the purpose of the interest paid is relevant.
The taxpayer, in our view, need then only prove (or your opinion) that the amount withdrawn from the bond were used to acquire the property and that the property produced the rental income.