The deductibility of interest : a controversial field.

Abstract

For any expenditure to qualify as a deduction against income, the Income Tax Act No 58 of 1962 as amended (the Act), requires that the expenditure fall within the ambit of section 11 (a) (the general deduction formula) read together with section 23 (g). What may be considered a prudent and proper deduction from an accounting point of view is of no consequence, unless, that deduction is permissible under the Act. Consequently, a deduction will only be allowed when it is incurred in the production of income. The deductibility of interest has always been a vexing question. Although its deductibility is determined in terms of the general deduction formula, the courts have held widely differing views on the subject of its deductibility. The taxpayer's purpose in borrowing money is an important factor in determining the deductibility of interest. If the money was borrowed for the purposes of earning income, the interest will be deductible. It is immaterial that the borrowed money was not applied in a manner that produced income; as long as the taxpayer's purpose in borrowing the money was to use it in the production of income. The courts have, however, failed to settle the issue. Similar cases have resulted in different judgements. It is therefore essential that taxpayer carefully applies sections 11 (a) and 23 (g) to determine the deductibility of interest before obtaining financing for business purposes.