Taxpayers score a major win against SARS
The Supreme Court of Appeal (SCA) has delivered a legal blow to the South African Revenue Service (SARS), ruling in favour of taxpayers looking for fair tax deductions.
The ruling centred on financing-related charges—amounts lenders charge to make funding available to a borrower.
These fees are often called raising fees, arrangement fees or facility fees, and are typically calculated as a percentage of the loan amount.
According to Tax Consulting SA, these fees form part of the overall cost of obtaining debt finance, and the question before the SCA was whether they are tax-deductible.
The SCA ruled that they are—at least in the specific circumstances outlined in law.
Tax deductions under section 24J of the Income Tax Act are allowable on “interest or similar finance charges”.
This was changed from a previous reading of “interest or related finance charges” in 2016.
Tax Consulting said tax deduction on the charges has been the subject of legal debate because the laws do not define ‘related finance charges’ or ‘similar finance charges’.
This has been a pain point for multiple taxpayers, particularly those in capital-intensive industries. This includes property investors, infrastructure developers, renewable energy projects and private equity funds.
Broadly, any taxpayer that relies heavily on debt financing and refinancing arrangements could be adversely affected by SARS’s interpretation of undefined “similar finance charges”.
In the case before the SCA, Cornucopia Trust, a Bloemfontein-based property investment trust, secured substantial funding from Sanlam Group entities to acquire and refinance specific commercial properties.
As part of these transactions, the trust paid upfront raising fees of approximately 2% of the value of the loan facilities.
However, SARS disallowed tax deductions on the fees on the basis that, although the raising fees were finance charges, they were not sufficiently “similar to interest” to fall within section 24J.
Technicalities of ‘similar to interest’
The tax service argued that the 2016 change to the laws referring to “similar to interest” was intended to narrow the scope of deductible financing costs and to exclude fee increases.
SARS said that the fee was an upfront, once-off payment incurred before a loan agreement took effect, covering the arrangement of the loan rather than the use of the borrowed money.
Cornucopia argued that raising fees was an economic reality of finance and a well-known commercial concept inextricably tied to accessing a loan.
Without the fee, there would be no access to or receipt of a loan’s funds.
The fee is directly tied to the loan amount and could be balanced against an interest rate to achieve the same commercial outcome.
According to the SCA judgment, while the court accepted that the 2016 changes to the tax law’s definition were intended to narrow the provision, it rejected SARS’ interpretation.
The court found that the raised fees were directly linked to the amount borrowed, were necessary to access the funding and formed an integral part of the overall funding arrangement.
The fees were not merely consideration for arranging the facilities but formed part of the consideration paid for the provision of credit itself.
The court also recognised that lenders could structure the cost of funding in different ways.
A facility could carry a higher interest rate and a lower raising fee, or vice versa, while achieving substantially the same commercial outcome.
For this reason, the court concluded that the fees were sufficiently similar to interest and therefore deductible under section 24J.
Tax Consulting said the ruling is a major victory for taxpayers and goes beyond merely resolving a technical interpretation of the law.
“Deductibility directly affects the after-tax cost of borrowing and the economics of debt-funded transactions,” it said.
“Sectors that rely heavily on external funding will find that this judgment provides important authority for taxpayers seeking to deduct financing charges that share relevant functional characteristics with interest and form part of the lender’s compensation for the provision of credit.”
However, the group also warned that it should not be seen as a blanket approval of all costs incurred in connection with funding transactions.
The court distinguished raising fees from more peripheral expenses such as legal fees, advisory costs and administrative charges.
“Taxpayers will still need to demonstrate that a particular fee forms part of the cost of obtaining credit rather than merely facilitating the transaction,” it said.
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