I have a case with a client regarding the deductibility of legal fees in regards to the acquisitions of Investment property. I am satisfied with the fact that we capitalise the legal fees paid for the acquisition of a property but I have a concern regardi
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
Under paragraph 20(1) of the Eighth Schedule, the base cost of an asset acquired by a person is the sum of –
(c) the following amounts actually incurred as expenditure directly related to the acquisition or disposal of that asset namely –
(i) the remuneration of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal advisor, for services rendered;
Of course, if it is part of base cost, the relevant material must be retained until the base cost must be determined - when the property is disposed of. Based on paragraph 20(1), it would include the amounts incurred in respect of services rendered by a legal advisor, but paragraph 20(2) then is relevant.
Raising fees are dealt with in paragraph 20(2) of the Eighth Schedule to the Income Tax Act. We copied it for ease of reference below:
“The expenditure incurred by a person in respect of an asset does not include any of the following amounts—
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borrowing costs, including any interest as contemplated in section 24J or raising fees;
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expenditure on repairs, maintenance, protection, insurance, rates and taxes, or similar expenditure; and
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the valuation date value of any option or right to acquire any marketable security contemplated in section 8A (1),
other than borrowing costs and expenditure contemplated in subparagraph (1) (g).”
SARS’s view is that “bond registration and cancellation costs are excluded from base cost under para 20(2), since they represent a borrowing cost.”
A deduction can made in terms of section 24J(2) of the Act, if the requirements of the section is met.