A taxpayer has a house bond on his primary residence. He then buys another property for the purpose of renting it out, which he then does. However he finances this second property via taking his primary residence bond- i.e. draws more money from the initi
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
The principle, with regard to any interest-bearing debt (we leave instruments out for the moment) is that an amount of interest incurred during a year of assessment, 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. See section 24J(2) of the income Tax Act in this regard.
We submit that the letting of property would meet “the income of that person derived from carrying on any trade” requirement. This is because a trade (as defined in section 1(1)) specifically includes that.
Section 23(b) of the Income Tax Act, may present the taxpayer with a problem here. This is because the purpose of the original finance was in respect of “property … acquired for purposes of the appellant’s own occupation.” The appellant being the taxpayer – see Tax Case 13791 (and 2).
The taxpayer would need to meet the onus and prove that the amount taken from the bond was to acquire the rental property in order to make the deduction of the related interest.
The amount incurred is then calculated in accordance with section 24J. We accept that the interest will be in respect of both the domestic and the trade purpose. Apportionment must then be done in terms of section 23(g).