South Africa: Loans - a seriesPublished on 07 Jan 2021
Number Three – general rules relating to loans
Loans are very common in business. It is unsurprising, therefore, that various tax rules in respect of them have been introduced over the years. These include rules pertaining to cross-border loans or loans between related parties.
Whereas some of the rules are universal, present in the legislation of many countries, some are specific to South Africa where loans are also subject to exchange control rules.
In this last, in a series of three, some of the general rules relating to loans are dealt with. All references to ‘section’ are in respect of the South African Income Tax Act (‘the Act’). Tax legislation is subject to constant changes. The rules as per this article are generally those that apply in the 2020/21 tax year.
The tax legislation provides for extensive rules in respect of concessions or compromises (write-offs) of debts. Among other things, such a compromise can result in the reduction of the base cost of the asset funded with the debt by the debtor, or full normal income tax on the debt benefit.
The tax legislation (sections 41 to 47) provides for extensive roll-over relief in respect of transactions within a group and related circumstances. These sections and others contain various rules on debt associated with the transactions.
Tax exemptions in respect of interest
In the case of a person younger than 65 a ZAR23,800 annual tax exemption from interest applies. For persons 65 and older the amount is ZAR34 500. In addition, the Act allows for an exemption in terms of defined ‘tax free investments’. Contributions in respect of tax-free investments are limited to ZAR33,000 per year and to a lifetime limit of ZAR500,000 in aggregate (section 12T).
Interest on hybrid debt instruments
The Act (sections 8F and 8FA) contains complicated rules in terms of which interest on so-called ‘hybrid debt instruments’ can be regarded as dividends in specie. This means that no tax deduction can be claimed on the payment of the interest and, in addition, it could be subject to dividends tax. Simply stated, a debt may fall into this category if it has equity-like characteristics, including where it is convertible to shares. Equally, even if the debt instrument itself is not caught, the interest payments may be caught if they have characteristics akin to dividends or profit-distributions.
Submission of tax returns
The South African Government annually publishes a Gazette with information on who needs to submit an income tax return. This depends on factors such as the type of income, the age of the person (in the case of a natural person) and whether or not the person is a South African tax resident. It is necessary to study the provisions in the Gazette in detail but, generally, if any interest subject to normal income tax in excess of the interest exemption is earned, there is an obligation to submit an income tax return.
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