Similar Finance Charges – SARS’ view on loan raising fees refuted

By Jean-Louis Nel – Tax Director

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Section 24J, read with Section 11(x), of the Income Tax Act No 58 of 1962 (“ITA”) permits a deduction against a taxpayer’s income of any:

• Interest paid in respect of a loan; or
• Similar finance charges paid in respect of a loan.

It is common for a borrower to pay raising fees to the lender or arranger of a loan in consideration of providing the loan to the borrower or arranging the loan. This article explores whether such raising fees qualify as ‘similar finance charges’ and are thus eligible for a deduction under Section 24J.

SARS position

The draft interpretation note published by SARS in respect of section 24J of the ITA, the following view was enunciated by SARS:

• “A raising fee is not a charge of the same kind or character as “interest”. Consequently, a raising fee, as described above, is not a similar finance charge and will not constitute “interest” as defined under paragraph (a). It will therefore not qualify for a deduction under section 24J(2)” (emphasis added)

SARS concludes in the interpretation note that when interpreting the phrase ‘similar finance charges’, the phrase must therefore be interpreted to mean charges similar to ‘interest’. SARS further adopts the view that for a raising fee to be a ‘similar finance charge’ it must have the fundamental characteristics of common law interest.

Legal Position

In ITC 882 (1959) 23 SATC 239 (T), the court examined the nature of raising fees. In this case a bond was raised for the purpose of acquiring an asset of a capital nature. The court held that the fee for raising the bond to acquire a capital asset at a time before the building was lettable, was part of the money expended to produce the revenue-producing asset. Following the rationale, the raising fee was held to be linked to the taxpayer’s income earning structure and thus of a capital nature. SARS relies on the ITC 882 judgment in the draft interpretation note.

An inverse finding was made in the matter of SARS v South African Custodial Services (“SACS”) 2012 (1) SA 522 (SCA). In this matter, the Department of Correctional Services concluded a concession contract with SACS. In terms of the concession contract, SACS constructed and operated a prison in Louis Trichardt. Consequently to give effect to the contract, SACS took out loans of R384 million in order to finance the project and in so doing, incurred a financial advisory fee, a margin fee, a commitment fee, an initial fee, administration fees and legal fees. SACS sought to deduct the aforementioned costs. In a unanimous decision by the SCA, the SCA held that:

• “In order to bid for the tender and to raise the loans that it required to finance the construction of the prison, SACS incurred a number of fees payable to various parties
  ... SACS also incurred interest on its loans. It claims to be entitled to a deduction in respect of the various fees and the interest…
  …
• I am also of the view that the various fees are deductible in terms of s 11(bA): because of their close connection to the obtaining of the loans and the furtherance of SACS’ project, they qualify as ‘related finance charges’ for purposes of this section.” (emphasis added)

The effect of the Custodial judgment can be summarised as follows:

• The phrase “related finance charges” was given a broad interpretation to include a variety of payments related to a finance transaction, including payments which are clearly dissimilar to interest, such as legal fees relating to the transaction.
• The fees in question were thus held to be deductible due to their “close connection to” the loans.

The Tax Court in Fourways Precinct v Commissioner for the South African Revenue Service IT25042, 14 July 2022 followed the Custodial judgement when it held that a ‘statutory and execution fee’ and a ‘debt origination fee’, both upfront fees in the context of loans, constituted ‘related finance charges’. These fees can be classified as advanced condition, stated differently, fees payable prior to the granting of the loan, however, such fees are interlinked to the granting of the loan.

Following the Custodial judgment, the statutory regime was transformed whereby the definition ‘related finance charges’ was replaced with ‘similar finance charges’. The reason for this amendment is explained as follows in the Explanatory Memorandum on the Taxation Laws Amendment Bill 17B, 2016:

• “The proposed amendment in paragraph (a) of the definition of “interest” in subsection (1) replaces the word “related” with the word “similar” to clarifies (sic) the policy position that this applies to finance charges of the same kind or nature.” (emphasis added)

Taxpayer Trust v Commissioner for the South African Revenue Service(IT 76795) [2025] ZATC 1 (13 January 2025) is the first reported judgment that deals with the new phrase ‘similar finance charges’ with specific reference to a raising fee and whether a raising fee constitutes a ‘similar finance charge’. In this matter, the following arguments are relevant:

• SARS argued that raising fees must have the fundamental characteristics of common law interest, the same view as in the draft interpretation note based on the reasoning of ITC 882 (1959) 23 SATC 239 (T) judgment. Thus disregarding the principles set forth in Custodial and Fourways Precinct.
• SARS sought to distinguish the raising fees was that they were separate and distinct from the interest because they were incurred before the effective dates of the funding agreements. SARS argued that because the raising fees had to be paid before the taxpayer would receive the benefit of the loan [advanced condition], the raising fees were not compensation for the use / benefit of the money.
• Additionally, SARS argued that while the raising fees were expressed as a percentage of the loan amount, they were not fixed with reference to the “time value of money” and/or “the capital (loan amount) outstanding at any point during the term of the agreement.

Taking into account the argument raised by SARS, the court made the following findings:

• The payment of the raising fees is part and parcel of the compensation for the loan. Without the payment of the raising fees there would be no loan, and the taxpayer would not have had the benefit of the money. Thus, the taxpayer was required to make payment of the raising fee in order to consume the loan. This underlines the close proximity or association between the raising fees and the loans and is indicative of a relevant similarity between the two.
• It appears that SARS seems to appreciate the fact that the determination of the raising fee with reference to the loan amount constitutes a similarity. The fact that the raising fee is not determined with reference to the time value of money or the outstanding balance on the loan during the course of the agreement is a dissimilarity. However, in the court’s view, it is not a relevant dissimilarity and in making the argument, SARS is elevating “similarity” to “sameness”.
• The raising fees in question are ‘interest or similar finance charges’ as envisaged by section 24J(1). Whilst there is a residual linguistic tension with the text, it certainly does not yield an unbusinesslike and unwieldy result. On this basis there is no need to invoke the contra fiscum rule in this case, as there is not an irresolvable ambiguity.

Conclusion

The judgment of Taxpayer Trust v Commissioner for the South African Revenue Service refutes the draft interpretation note insofar that SARS is of the view that raising fees are not deductible in terms of section 24J of the ITA. The interpretive exercise employed by the court resulted in a clear distinction between what is the ‘same as interest’ and what is ‘similar to interest’. It is deduced from the judgment that the test to determine whether a fee is deductible will hinge on:

• The similarity in nature to that of interest; and
• The close proximity of the fee to the consumption of the loan.