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Sars takes aim at corporate interest free loans

Madeleine Schubert*

16 February 2009

The draft interpretation note in action.

South African Revenue Services (Sars) is on the interest free loan offensive, and corporate business could face millions in tax if their loan contracts are not properly structured.

There is definitely a shift in Sars's view of intra-company loans and a recent court case is an indication that the Receiver of Revenue has been quick to implement its draft interpretation note issued in the fourth quarter of 2008..

The interpretation note, issued in the fourth quarter of 2008, sets out how Sars intends to implement new tax principles (Brummeria principles) that were confirmed in the well documented court case of Sars vs Brummeria Renaissance 2007.

In this case it was confirmed that the right to use loan capital interest free had a monetary value, and although the value of this right could not be turned into money it should be included in the gross income of the tax payer in the year of assessment in which it was accrued.

Sars will apply the Brummeria principles in all cases where the right to use an interest free loan is granted in exchange for or as a quid pro quo for goods supplied, services rendered or any other benefit given.

The receipt or accrual in the form other than money will have to be valued and included in the taxpayer's gross income for the year of assessment in which it was received or accrued.

The method of deciding the value of the loan should be done objectively taking into account the fact and circumstances of the loan and the intention of the lender and borrower.

Complicating matters further is that Sars points out that applying the average weighted prime overdraft rate applicable for the relevant year does not necessarily mean that this will always be the most appropriate method of valuing a right to use an interest free loan.

Further, if the shareholder of group-company that grants the loan does not necessarily intend there to by an exchange of goods or services or any other benefit then the Brummeria principles do not apply.

For example, if a holding company were to provide an interest free loan to a subsidiary to invest as capital expenditure it would not attract tax. However, if in exchange for the interest free loan the holding company required either goods or services in return without a charge or fee then this would be deemed to be taxable.

Companies found to be contravening these tax principles could face substantial tax bills as the taxable portion of the deemed interest to be recouped will be assessed at the interest rate applicable at the time the interest free loan was granted.

Through careful tax planning and by being risk aware companies can ensure that they do not fall foul of these principles.

*Madeleine Schubert is from Shepstone & Wylie Attorneys

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