I keep getting the error below, im sending the mail instead, please would you be able to clarify as per SARS’s response SARS is of the opinion that the interest is excessive in terms of Section 11(a) read with Section 23(g) how do they determine ‘excessiv
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
This is quite a complex issue and we probably need more information before we can give appropriate guidance.
The Income Tax Act does not specifically address "excessive expenditure". Section 11(a) of the Act provides that expenditure is deductible if, inter alia, it is actually incurred in the production of income. Section 23(g) of the Act proceeds to limit the deduction of such expenditure only to the extent that it is laid out or expended for the purposes of trade. The deduction of interest was made under section 24J(2) of the Act, but the same principle will apply – it refers to “must be deducted from the income of that person derived from carrying on any trade, if that amount is incurred in the production of the income”.
In a number of reported cases it was held that the Commissioner is entitled to disallow expenditure to the extent that it is considered to be excessive, on the grounds that the expenditure is not actually incurred in the production of the income, as required by section 11(a), nor laid out or expended for the purposes of trade, as is required by section 23(g), but is inspired by some other motive.
We need to know the grounds provided by SARS in your case.
The approach followed by Judge Willis in a Tax Court Case (case no. 12262) Tax Court in determining whether or not the marketing and management expenditure incurred was excessive essentially involved the application of a two step inquiry in respect of each type of expenditure incurred:
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firstly, an evaluation of the purpose for which the relevant expenditure was incurred by the taxpayer against evidence that illustrated whether such purpose was legitimate and whether the respective objectives were met; and
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secondly, a comparison of the expenditure incurred by the taxpayer against international and/or industry norms.