A new ruling from South Africa’s highest civil appeal court has reshaped how certain loan-related charges are treated for tax purposes, offering welcome clarity to businesses that rely heavily on debt finance. The decision settles a long-running dispute over whether upfront fees charged by lenders can be claimed as a deduction, and it carries implications well beyond the single case that gave rise to it.
Key Takeaways
- Raising fees are now deductible: The SCA has confirmed that upfront raising, arrangement and facility fees, provided they are directly linked to the loan amount, qualify as “similar finance charges” under section 24J and can therefore be deducted for tax purposes.
- Debt-reliant sectors stand to gain: Property investors, infrastructure developers, renewable energy projects and private equity funds, all of which depend heavily on debt financing, now have stronger legal grounds to claim these deductions and reduce their after-tax cost of borrowing.
- The ruling is not unlimited: The court drew a clear line between raising fees and more peripheral costs such as legal, advisory and administrative fees, so taxpayers must still show that a specific charge forms part of the actual cost of obtaining credit rather than merely facilitating the transaction.
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Supreme Court of Appeal Rules in Favour of Taxpayers
The Supreme Court of Appeal (SCA) has handed down a significant legal setback to the South African Revenue Service (SARS), finding in favour of taxpayers who are pursuing fair and legitimate tax deductions.
The Supreme Court of Appeal, based in Bloemfontein, is South Africa’s second-highest court, sitting just below the Constitutional Court, and it is the final court of appeal for most civil and criminal matters that do not raise constitutional issues.
The judgment focused specifically on financing-related charges, which are the amounts that lenders levy in order to make funding available to a borrower in the first place.
What Are Raising Fees, Arrangement Fees and Facility Fees?
These charges go by several different names within the industry, and they are commonly referred to as any of the following:
- Raising fees
- Arrangement fees
- Facility fees
Regardless of the label used, these fees are generally worked out as a percentage of the total loan amount being advanced.
When comparing loan offers, it helps to look beyond the headline interest rate and ask lenders for the total cost of credit, since a lower interest rate is sometimes offset by a much higher upfront arrangement fee.
As explained by Tax Consulting SA, these charges make up part of the broader overall cost involved in securing debt finance, and the central issue placed before the SCA was whether such charges ought to be deductible for tax purposes.
Ultimately, the SCA determined that they are indeed deductible, at least under the particular set of circumstances set out in the relevant legislation.
The Legal Background: Section 24J of the Income Tax Act
Under section 24J of the Income Tax Act, tax deductions are permitted in respect of “interest or similar finance charges.”
This wording represents a shift away from the earlier version of the provision, which had previously referred to “interest or related finance charges,” a change that came into effect back in 2016.
According to Tax Consulting, the question of whether such charges qualify for a tax deduction has long been a source of legal disagreement, largely because the legislation itself does not clearly define what is meant by either “related finance charges” or “similar finance charges.”
This lack of clarity has proven to be a persistent difficulty for a wide range of taxpayers, and it has hit particularly hard among those operating within capital-intensive sectors of the economy. Industries most commonly affected include:
- Property investors
- Infrastructure developers
- Renewable energy projects
- Private equity funds
More broadly speaking, any taxpayer that depends heavily on debt financing, or on refinancing arrangements, runs the risk of being negatively impacted by the way SARS has chosen to interpret the undefined phrase “similar finance charges.”
The Case: Cornucopia Trust Versus SARS
The matter that came before the SCA involved Cornucopia Trust, a property investment trust based in Bloemfontein, which had obtained substantial funding from entities within the Sanlam Group in order to acquire and refinance a number of specific commercial properties.
As part of these financing arrangements, the trust was required to pay upfront raising fees amounting to roughly 2% of the total value of the loan facilities involved.
Despite this, SARS refused to allow tax deductions in respect of these fees, arguing that although the raising fees did qualify as finance charges, they were not sufficiently “similar to interest” to fall within the ambit of section 24J.
SARS’s Argument on ‘Similar to Interest’
SARS contended that the amendment made to the legislation in 2016, which introduced the “similar to interest” wording, had been specifically designed to narrow the range of financing costs that could be deducted, and to exclude increases in fees from qualifying.
The revenue authority further argued that the fee in question represented an upfront, once-off payment that was incurred before the loan agreement even came into force, and that it related to the arranging of the loan itself rather than to the actual use of the funds that had been borrowed.
Cornucopia, on the other hand, argued that raising fees reflect a genuine economic reality of the finance industry, and represent a well-established commercial concept that is inseparably linked to the process of accessing a loan.
The trust maintained that, without payment of the fee, there would be no way to access or receive the funds made available under the loan.
It further argued that the fee is directly linked to the size of the loan amount, and that it could be adjusted against the interest rate charged in order to arrive at the same overall commercial result.
The Court’s Findings
Based on the SCA judgment, although the court accepted that the 2016 amendments to the definition within the tax legislation had been intended to narrow the scope of the provision, it nonetheless rejected the interpretation put forward by SARS.
The court held that the raising fees were directly connected to the amount of money borrowed, that they were essential in order to gain access to the funding, and that they formed an integral component of the overall funding arrangement as a whole.
It found that the fees were not simply payment for the arranging of the facilities, but instead formed part of the consideration paid in exchange for the provision of credit itself.
The court additionally acknowledged that lenders have the ability to structure the cost of funding in a number of different ways, for example:
| Structure | Interest Rate | Raising Fee | Commercial Outcome |
|---|---|---|---|
| Option A | Higher interest rate | Lower raising fee | Broadly equivalent |
| Option B | Lower interest rate | Higher raising fee | Broadly equivalent |
On this basis, the court concluded that the fees were sufficiently similar in nature to interest, and were therefore deductible in terms of section 24J.
What This Means for Taxpayers
According to Tax Consulting, this ruling represents a major victory for taxpayers, and its significance extends well beyond simply resolving a narrow, technical question of legal interpretation.
Deductibility has a direct bearing on the after-tax cost of borrowing, as well as on the overall economics underpinning debt-funded transactions, the firm explained.
Sectors Likely to Benefit
Sectors that depend heavily on external sources of funding are likely to find that this judgment offers important legal backing for taxpayers who are seeking to deduct financing charges that share meaningful functional similarities with interest, and that form part of the compensation received by the lender in exchange for providing credit.
A Word of Caution: Not a Blanket Approval
That said, the organisation was also careful to warn that the judgment should not be treated as a blanket approval covering every single cost incurred in connection with funding transactions.
The court drew a clear distinction between raising fees and other, more peripheral expenses, such as legal fees, advisory costs and administrative charges.
Taxpayers will still be required to demonstrate that any particular fee genuinely forms part of the cost of obtaining credit itself, rather than simply relating to facilitating the broader transaction, the firm noted.
Conclusion
This ruling gives taxpayers a firmer footing when it comes to claiming deductions on the upfront costs of borrowing, particularly in sectors that lean heavily on debt to fund large-scale projects. While it does not open the door to deducting every cost associated with a financing transaction, it does confirm that fees genuinely tied to the provision of credit, such as raising and arrangement fees, sit on the same footing as interest for tax purposes. Businesses would be well advised to revisit their financing arrangements with a tax adviser to see where this judgment might apply to their own circumstances.
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