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Tax Talk

Tax Talk

Author: Natalie Wocke
Date: 2014-08-29
TAX DEDUCTIBILITY OF INTEREST EXPENDITURE

A frequently asked question is whether expenditure incurred on interest, is tax deductible. In order for the interest to be deductible from taxable income, it should be incurred for the purpose of trade, in the production of income, and may not be of a capital nature. Interest incurred to fund expenditure of a private or domestic nature is not tax deductible.

Interest incurred to purchase a capital asset used for the purpose of trade, is not considered to be capital in nature but rather a payment for the use of funds. This is revenue in nature and tax deductible.

In view of this, interest on an Installment Credit Agreement for an asset such as a truck or other machinery used for trade purposes, is tax deductible.

Where a person trades as an incorporated entity, and advances funds to the entity which are applied for the purpose of trade, they are entitled to charge a market related rate of interest to the entity for the use of the funds.

A situation which frequently arises is one where a shareholder of a company or member of a CC advances funds to their company for the purpose of financing business assets, from their home loan. In the hands of the shareholder or member, the interest received on loan account is taxable income. It is the practice of the South African Revenue Service to allow a deduction of interest incurred in the production of interest income, in terms of practice note 31. Such expense will be limited to the interest income incurred.

For a full assessment of your unique circumstances, make an appointment at your nearest branch of Roberts and Chaplin. Ballito(032-586 0387) or Umhlali(032-947 1010).