Taxpayers Get Major Win Against SARS, With Ruling Set to Benefit Property and Energy Sectors

• The Supreme Court of Appeal delivered a significant ruling involving SARS and a Bloemfontein property trust over loan-related tax deductions
• The case centred on whether upfront fees paid to secure financing qualify as deductible costs under the Income Tax Act
• The judgment has major implications for capital-intensive sectors that rely heavily on debt financing across South Africa

South African taxpayers received a major legal win after the Supreme Court of Appeal ruled against the South African Revenue Service in a dispute over the deductibility of debt financing costs.

The case was brought by Cornucopia Trust, a Bloemfontein-based property investment entity. To acquire and refinance commercial properties, the trust paid upfront raising fees that amounted to roughly 2% of its loan value. SARS refused to allow the trust to deduct these fees from its taxable income.

What SARS argued

The tax authority's position was rooted in a 2016 amendment to the Income Tax Act, which changed the wording around deductible financing costs to "similar finance charges." SARS interpreted this narrowly, arguing that once-off upfront fees paid before a loan begins are simply payments for setting up a credit facility and do not count as consideration for the use of borrowed funds.

Read also

SA retiree earns R45k monthly from 15 township back-room rentals

Cornucopia Trust pushed back, arguing that raising fees are a fundamental economic part of accessing debt finance. The trust pointed out that these fees are calculated in proportion to the loan principal and can be weighed against interest rates to produce the same commercial result for a lender.

What the court decided

The SCA sided with the trust. The court found that raising fees form part of the actual cost of obtaining credit and that without paying them, a borrower simply cannot access the funds. Judges also noted that lenders routinely structure financing deals differently, sometimes charging higher interest with lower upfront costs, or lower interest with higher fees, but the commercial outcome for the lender remains identical. Given this interchangeability, the court concluded that such fees function much like interest and qualify as deductible under section 24J of the Income Tax Act.

The ruling is particularly relevant for sectors that are heavily reliant on debt and refinancing, including property investment, renewable energy, infrastructure development and private equity funds.

Read also

SARS can freeze and direct-debit money from bank accounts, the High Court rules

According to the report by BusinessTech, tax experts have been careful to note that the judgment does not open the door to sweeping deductions. Peripheral costs like legal fees, independent advisory charges and administrative expenses remain non-deductible because they facilitate a transaction rather than forming part of the direct cost of credit.

More on SARS, tax and the law in SA

• Briefly News recently reported on new tax plans for minibus taxis and e-hailing and an expert's warning about who could end up paying for them.
• A Kaya FM presenter is facing a SARS court judgment over an unpaid tax bill, and she has now responded.
• A High Court ruling on SARS's power over bank accounts has changed what many South Africans thought they knew about the tax authority's reach.

Source: Briefly News