SARS announces big tax deduction change for taxpayers
SARS is withdrawing Practice Note 31 and the National Treasury will be proposing a new section to be added to the Income Tax Act.
The South African Revenue Services (SARS) withdrawal of Practice Note 31 will be effective 1 January 2025.
This note is in relation to the interest paid on money borrowed.
"The practice note came into effect in October 1994 and provides a concession to taxpayers who accrue interest income by allowing them to deduct tax on expenditures incurred in producing that interest income." (Business Tech)
In other words, Practice Note 31 allowed persons to accumulate interest as an income based on money borrowed for lending. This will no longer be in practice as SARS attempts to "clamp down on tax abuse transactions".
From a private equity perspective, "the partners, directors, and executives rely on Practice Note 31 to claim the interest expenditure incurred on the loan provided by the financial institution against the interest income earned from the incorporated partnership." (Business Tech)
This is open to tax abuse and is the reason behind withdrawing the practice.
The announcement to first withdraw Practice Note 31 was made in November 2022. "The National Treasury proposed adding a new section, Section 11G, to the Income Tax Act in the 2023 Draft Taxation Amendment Bill, signed into law in December 2023."
However, the new section caused some dispute because it only provided tax deductions to "companies", while Practice Note 31 applied to "persons". In essence, this meant that taxpayers who benefitted from the deductions previously would not be able to use the new section.
According to Business Tech, "The Treasury accepted the comments and expanded the concession in section 11G to apply to any person who incurs interest expenditure in the production of interest income without regard to any shareholding threshold of any back-to-back lending arrangement."
Please note that Practice Note 31 is still in effect until the new laws take effect on 1 January 2025.
In other news, SARS reported a new tax refund scam doing its rounds.
"The latest scam is an SMS indicating you are eligible for a refund. To ‘complete your refund,’ the scam suggests you click a link linking to a fraudulent website." (SARS)
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