Are raising fees similar to interest?

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Doelie Lessing | Director | Head of Tax | Werksmans Attorneys | mail me |

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The tax court, in a reportable judgment handed down on 13 January 2025, considered whether raising fees are finance charges which are similar to interest, and therefore, tax-deductible on the same basis as interest.

Dispute – deductibility of raising fees

The tax dispute centred around the tax deductibility of raising fees incurred by the taxpayer when it financed and refinanced the acquisition of some of its business assets. As part of the funding arrangements, an entity within the lender’s group of companies charged a raising fee calculated as a percentage of the loan capital, which had to be paid in one lump sum as a pre‑condition for the lender advancing the loan capital.

The taxpayer claimed a deduction for the raising fees paid on the basis that they met the definition of “interest“, which includes any finance charges similar to normal interest. Taxpayers are eligible to claim a deduction for amounts which meet the definition of “interest” in section 24J of the Income Tax Act, 58 of 1962, even if the amounts are capital in nature, provided only that the expense is incurred in the course of carrying on a trade and in the production of income.

Evolution of “interest” definition

The definition of “interest” used to include finance charges “related” to interest, but this was amended to include only finance charges “similar” to interest. The amendment was presumably in response to the judgment of the Supreme Court of Appeal in C:SARS v South African Custodial Services 2012 (1) SA 522 (SCA), in which the phrase “related finance charges” was given a broad interpretation to include a variety of payments related to a finance transaction, including payments which are clearly dissimilar to interest, such as legal fees relating to the transaction.

In ITC 1963 85 SATC 246, a dispute about whether raising fees constituted “related finance charges” prior to the amendment of the definition of “interest”, the taxpayer was successful in its argument that raising fees were indeed “related finance charges” and thus deductible as “interest” for tax purposes. 

Court’s interpretation of “similar finance charges”

The recent tax court judgment is the first to consider the meaning of the new phrase…

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