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SARS: Proposed Sec 11G to replace Practice Note 31
- 31 August 2023
- Accounting
- South African Accounting Academy
An indispensable requirement for the claiming of an income tax deduction is that the taxpayer must be carrying on a trade and the expenditure in question must be incurred in the production of the income derived from carrying on such trade. Our courts have held that the carrying on of a trade involves an active step and something far more than merely watching over existing investments that are not, and are not intended or expected to be, income-producing during the year in question.
Practice Note 31, issued in 1994, contains such an administrative concession which specifically allows a person who is not a money lender to claim a deduction in respect of expenditure incurred in the production of interest income on capital or surplus funds invested, notwithstanding that such interest income is not derived from the carrying on of a trade. The deduction may not, however, exceed the interest income (i.e. the deduction cannot result in a loss). The effect of Practice Note 31 is, therefore, to disregard the legal requirement that the taxpayer must be carrying on a trade in respect of its passive investment activities in order to claim the expenditure incurred in respect of such activities as a deduction.
The first draft of the proposed legislation was published on 31 July 2023 in the form of section 11G of the draft Taxation Laws Amendment Bill, 2023 (Bill). If adopted, the proposed provision will come into effect on 1 January 2024 in respect of years of assessment commencing on or after such date. The proposed provision extends the concession provided in Practice Note 31 only to intra-group loans in limited circumstances.
The proposed section 11G must still go through the public participation phase prior to being promulgated and Practice Note 31 remains effective at least until the effective date of section 11G (the section is to take effect from tax years commencing on or after 1 January 2024, so that for most taxpayers likely to be affected adversely, it will apply from 1 March 2024).
Refer to an informative article on this topic at https://www.werksmans.com/legal-updates-and-opinions/proposed-draft-legislation-to-replace-practice-note-31-of-1994/
Click here to download the Practice Note:
Relevance to Auditors, Independent Reviewers & Accountants:
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The Income Tax Act is yet another piece of legislation that your clients must comply with, and which you must assess compliance with. If they don’t comply with the relevant laws and regulations, you have certain reporting obligations in terms of NOCLAR (Non-Compliance with Laws And Regulations) – this could include reporting to management, qualifying your audit opinion, reporting a Reportable Irregularity, etc.
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As an auditor, independent reviewer, accountant and tax practitioner, you need to be aware of the latest guides and other publications issued by SARS.
Relevance to Your Clients:
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Entities and individuals have a duty to comply with the Income Tax Act.
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Taxpayers should be aware of the latest publications issued by SARS.