S24J discussion Flashcards
interest expense incurred by her on her mortgage bond
would be deductible in the determination of her 2023 taxable income
The deduction of the interest that is incurred on the mortgage bond at ZA Bank can only be
deducted if Nomzamo meets the requirements of s24J(2) as she is the issuer of an instrument
(she has to pay the interest to the bank)
S23B(3)
In terms of s23B(3), no deduction may be allowed under s11(a) where a deduction or allowance
may be granted under a specific provision. Therefore s11(a) must not be considered.
In terms of s24J(2) an amount of interest incurred must be deducted:
based on the yield to maturity method – s24J(5) (effective interest rate).
The burden of proof in terms of s102 of the Tax Administration Act rests on Nomzamo ‒ she has
to prove that the interest incurred is deductible, if the matter is disputed by SARS. Nomzamo will
have to prove the following
1 The definition of ‘trade’, in s1(1) of the Act, should be given a wide interpretation (Burgess) and
specifically includes a venture. It is unlikely that the passive investment of funds to derive interest
would constitute a trade
Court case:
borrowing money
and re-lending it at a higher rate of interest, thereby making a profit, constitutes the carrying on
of a trade …’
another court case necessary concomitant
needs to prove that the money obtained from the bond was for the purpose of making
the loan to the company, thus the interest incurred should be closely connected to the
production of income
It is clear that the interest incurred by her will be in the production of the income derived from
the company and can be deductible under s24J(2). The purpose was therefore to produce
income.
As the interest on the bond includes interest relating to the acquisition of her primary residence,
to the extent that the interest relates to the funding of the primary residence, it is incurred for
private purposes and not for purposes of trade (section 23(b)).
only a proportionate share of the interest incurred on the bond, relating to the amount
advanced to the company, was in the production of income and can be deductible under s24J(2).
Another Scenario S24J
The provisions of s 11(a) are not relevant to this discussion as s23B(2) states that s 11(a) may not be
applied where a specific provision (s24J) is available for an item
The deduction of the interest that you incurred on the bond at the bank can only be deducted if you
meet the requirements of s24J(2) as you are the issuer in relation to an instrument
The section requires that the amounts can only be deducted from the income of that person if it is
derived from carrying on any trade and the amount is incurred in the production of the income
Given that the purpose of the loan is to earn interest income above bond interest, the interest is
incurred in the production of income.
(PE Tramway)
. In terms of section 1(1) of the Income Tax Act a trade includes a venture. Judge Grosskopf said in the
Supreme Court of Appeal in the Burgess case that the definition of trade should be given a wide
interpretation (held a venture in the hope of making profit it would constitute a trade).
Note: Solaglass Finance or Sentre Oes or Scribante case, Judge Hefer said that the ‘…borrowing money
and re-lending it at a higher rate of interest, thereby making a profit, constitutes the carrying on of
a trade…’. (based on Burgess) .
Given that the money is been advanced to the company at a higher rate of interest to that charged
on the loan raised, Mr Cele is deemed to be carrying on a trade with respect to this arrangement.
Conclusion: if your interest from other sources exceeded the amount of the exemption. The interest
will therefore be ‘income’ and a deduction can be claimed.
We submit that you will be able to meet the burden of proof in terms of section 102 of the Tax
Administration Act that you are carrying on a trade and that the amounts were incurred in the
production of income and therefore that the deduction can be made
