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Income Tax Act, 1962 (Act 58 of 1962)

Chapter II: The Taxes

Part I: Normal Tax

23M. Limitation of interest deductions in respect of debts owed to persons not subject to tax

[Heading substituted by section 41 of the Tax Laws Amendment Act, 2016 (Act No. 15 of 2016)]

 

(1)        For the purposes of this section—

 
‘adjusted taxable income’

means taxable income—

(a) reduced by—
(i) any amount of interest received or accrued;
(ii) any amount included in the income of a person as contemplated in section 9D(2);
(iii) any amount recovered or recouped in respect of an allowance contemplated in this Act in respect of a capital asset as defined in section 19; and

(b)        with the addition of—

(i) any amount of interest incurred;

[Subparagraph (i) amended by section 37(1)(a) of Act No. 43 of 2014]

(ii) any amount allowed as a deduction in terms of this Act in respect of a capital asset as defined in section 19 for purposes other than the determination of any capital gain or capital loss; and

[Subparagraph (ii) amended by section 37(1)(a) of Act No. 43 of 2014]

(iii) any assessed loss or balance of assessed loss allowed to be set off against income in terms of section 20;

[Subparagraph (iii) inserted by section 37(1)(b) of Act No. 43 of 2014]

 

‘average repo rate’

in relation to a year of assessment means the average of all ruling repo rates determined by using the daily repo rates during that year of assessment;

 

‘controlling relationship’

means a relationship where a person directly or indirectly holds at least 50 per cent of the equity shares in a company or at least 50 per cent of the voting rights in a company is exercisable by a person;

[Definition amended by section 37(1)(c) of Act No. 43 of 2014]

 

‘debtor’

means a debtor who is—

(a) a person that is a resident; or
(b) any other person who is not a resident that has a permanent establishment in the Republic in respect of any debt claim that is effectively connected with that permanent establishment;

[Definition amended by section 37(1)(d) of Act No. 43 of 2014]

 

‘interest’

means interest as defined in section 24J;

 

‘issue’

in relation to a debt, means the creation of a liability to pay or of a right to receive an amount in terms of that debt;

 

‘lending institution’

means a foreign bank which is comparable to a bank contemplated in the Banks Act;

 

‘repo rate’

means the interest rate at which the South African Reserve Bank enters into a repurchase agreement contemplated in section 10(1)(j) of the South African Reserve Bank Act.

 

(2) Where an amount of interest is incurred by a debtor during a year of assessment in respect of a debt owed to—
(a) a creditor that is in a controlling relationship with that debtor; or
(b) a creditor that is not in a controlling relationship with that debtor, if that creditor obtained the funding for the debt advanced to the debtor from a person that is in a controlling relationship with that debtor,

and the amount of interest so incurred is not during that year of assessment—

(i)
aa) subject to tax in the hands of the person to which the interest accrues; or
bb) included in the net income of a controlled foreign company as contemplated in section 9D in the foreign tax year of the controlled foreign company commencing or ending within that year of assessment; and
(ii) disallowed under 23N,

the amount of interest allowed to be deducted may not exceed the amount determined in accordance with subsection (3).

[Subsection 2 amended by section 37(1)(e) of Act No. 43 of 2014 - effective 1 January 2015]

 

(3) The amount of interest allowed to be deducted in respect of all debts owed as contemplated in subsection (2), in respect of any year of assessment must not exceed the sum of—

(a)        the amount of interest received by or accrued to the debtor; and

(b)        a percentage of that adjusted taxable income of that debtor to be determined in accordance with the formula—

A= B ×

C

D

in which formula—

(a) 'A' represents the percentage to be determined;
(b) 'B' represents the number 40;
(c) 'C' represents the average repo rate plus 400 basis points; and
(d) 'D' represents the number 10,

but not exceeding 60 per cent of the adjusted taxable income of that debtor,

reduced by so much of any amount of interest incurred by the debtor in respect of debts not contemplated in subsection (2) as exceeds any amount not allowed to be deducted in terms of section 23N.

[Subsection (3)(b) amended by section 37(1)(f) of Act No. 43 of 2014 - effective 1 January 2015]

 

(4) So much of any amount of interest as exceeds the amount determined in terms of subsection (3) may be carried forward to the immediately succeeding year of assessment and, subject to subsection (2), must be deemed to be an amount of interest incurred in that succeeding year of assessment.

 

(5) Where an amount of interest is to be taken into account in terms of this section and in terms of section 23N, that amount of interest shall only be taken into account in terms of this section after section 23N has been applied.

[Subsection 5 amended by section 37(1)(g) of Act No. 43 of 2014]

 

A= B ×

C

D

 

in which formula—

(a) ‘A’ represents the percentage to be applied;
(b) ‘B’ represents 40;
(c) ‘C’ represents the average repo rate; and
(d) ‘D’ represents 10.

 

(6)        This section does not apply—

(a) to so much of the interest as is incurred by a debtor in respect of a debt owed to a creditor as contemplated in subsection (2) where—
(i) that creditor funded that debt amount advanced to that debtor with funding granted by a lending institution that is not in a controlling relationship with that debtor; and
(ii) that interest is determined with reference to a rate of interest that does not exceed the official rate of interest as defined in paragraph 1 of the Seventh Schedule plus 100 basis points; or
(b) to any interest incurred by a debtor in respect of any linked unit that is held by a creditor as contemplated in subsection (2) where that creditor is a long-term insurer as defined in the Long-term Insurance Act, a pension fund or a provident fund, if—
(i) the long-term insurer, pension fund or provident fund holds at least 20 per cent of the linked units in that debtor;
(ii) the long-term insurer, pension fund or provident fund acquired those linked units before 1 January 2013; and
(iii) at the end of the previous year of assessment 80 per cent or more of the value of the assets of that debtor, reflected in the annual financial statements prepared in accordance with the Companies Act for the previous year of assessment, is directly or indirectly attributable to immovable property.