The interaction between the interest deductibility rules contained in the Income Tax Act 58 of 1962

Abstract

This dissertation considers the conceptual interaction between section 23M and section 31 of the Income Tax Act, 1962. Both sections limit tax deductible interest expenditure paid to non-resident related persons based on specific requirements. The dissertation establishes the ambit of each section by relying on an interpretive guide, which takes into account three aspects of interpretation. These three aspects are: the ordinary grammatical meaning of the words comprising each section; the contextual understanding of each section; and the purpose of each section. The dissertation determines that there is an overlap in the ambit of section 23M and section 31 in respect of the taxpayer to which each section applies, interest as determined for purposes of the common law and the purpose of each section, being to prevent tax base erosion through excessive interest rate deductions. Despite the presence of an overlap, a taxpayer falling within the ambit of both sections is always limited to a deduction equal to the smaller answer yielded by section 23M or section 31. However, in respect of the carry-forward in section 23M(4) there is uncertainty as to the calculation of the carry-forward. The dissertation recommends an amendment to section 23M(4) to clarify the calculation of the carry-forward amount. In the absence of a carry-forward, the dissertation determines that a possible interpretational solution may be to calculate the carry-forward with reference to actual interest expenditure and to subject any deduction in respect of an amount carried forward to section 31 in the year of assessment during which a deduction is claimed.