I believe that the taxpayer (my client) should be able to claim the interest paid by him on a loan advanced to him by Nedbank as a deduction against interest received from his director’s loan account paid by the company as the company is currently trading
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
We mentioned in our first response that the taxpayer will only be able to make the deduction under section 24J(2) – we accepted that there is no right of redemption at any time during the year of assessment and no deferred interest.
We submit that what is relevant then is “the income of that person derived from carrying on any trade” requirement in section 24J(2). In order for the taxpayer to make a deduction it is necessary for the taxpayer to be able to meet the burden of proof that a trade was being carried on, and then that the amount of the expense was incurred in the production of the income. Judge Heher of the Supreme Court of Appeal made the following comment in the Scribante case:
“In addition, borrowing money and re-lending it at a higher rate of interest, thereby making a profit, constitutes the carrying on of a trade...” The Judge used the Burgess case as authority for this.
You say that there was “a loan advanced to him by Nedbank” and that the taxpayer want to make “a deduction against interest received from his director’s loan”. The fact that the company is trading is not relevant to whether the individual is carrying on a trade. The taxpayer would have to prove that the interest paid on the loan (to Nedbank) was incurred to produce interest received from the company. The interest from the company must of course then exceed the interest paid to Nedbank.
It is clear that, in deciding the issue, the purpose of obtaining the funding from Nedbank is important. The case that we mentioned is Tax Case No: 13791 and 13792, Judgment Date: 13 December 2016. Judge Yekiso, in that case, said that the taxpayer “failed to prove, as a matter of fact, that the purpose and the effect of the acquisition of a mortgage loan from Z Bank were for purposes of production of interest income.” The reasons provided in the case are not all correct, but the decision is correct. The bond was obtained for a private matter, the acquisition of a residence, and not in order to on-lent to the company.
On the assumption that the interest then meets the requirements for deduction, the deduction can’t be made by using “source code 4016”. We agree with you that the block would be “greyed out as a result of his remuneration” – principally because section 23(m) would deny the deduction, in this instance to be made under section 24J(2) as you rightly say.
As will be clear from the above, the deduction is not made against the taxpayer remuneration, but against the income from trade. The taxpayer will therefore declare the interest received as income from a trade and make the deduction of the interest paid there.