Regarding “Tax on Rental Income Expenses”, could a taxpayer claim “interest/finance charges” that are not linked to a “bank” loan /mortgage bond? For example the taxpayer has received a loan from a connected person. Interest is charged on the capital amou
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
Interest incurred in the production of income is deductible in terms of s24J of the Income Tax Act No.58 of 1962 (“ITA”). If the loan in question is repayable on demand then the deduction is taken under s11(a) of the ITA. Clearly the amount can’t be claimed twice.
SARS must allow a deduction if it meets the requirements of the Act.
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 and we accepted that the loan doesn’t carry deferred interest or that connected person could have required redemption during the year of assessment.
We submit that what is relevant here is “the income of that person derived from carrying on any trade” requirement. In order for the taxpayer to make a deduction it is necessary that the taxpayer must 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 (the rental) derived from that trade.