Income Tax Act, 1962 (Act No. 58 of 1962)Chapter II : The TaxesPart I : Normal Tax23M. Limitation of interest deductions in respect of debts owed to persons not subject to tax |
[Section 23M heading substituted by section 41 of the Tax Laws Amendment Act, 2016 (Act No. 15 of 2016)]
(1) For the purposes of this section—
means taxable income calculated before applying this section and before setting off any balance of assessed loss that has been carried forward from the preceding year of assessment—
[Words preceding paragraph (1)(a) substituted by section 26(1)(a) of the Taxation Laws Amendment Act, 2023 (Act No. 17 of 2023), Notice No. 4226, GG49894, dated 22 December 2023 - comes into operation on 1 January 2024 and applies in respect of years of assessment commencing on or after that date (section 26(2))]
| (a) | reduced by— |
| (i) | any amount of interest received or accrued that forms part of taxable income; |
| (ii) | any amount included in the income of a person as contemplated in section 9D(2); |
| (iii) | any amount recovered or recouped in respect of an allowance contemplated in this Act in respect of a capital asset as defined in section 19; and |
| (b) | with the addition of— |
| (i) | any amount of interest incurred that has been allowed as a deduction from income; |
| (ii) | any amount allowed as a deduction in terms of this Act in respect of a capital asset as defined in section 19 for purposes other than the determination of any capital gain or capital loss; |
| (iii) | [Paragraph (1)(b)(iii) deleted by section 26(1)(b) of the Taxation Laws Amendment Act, 2023 (Act No. 17 of 2023), Notice No. 4226, GG49894, dated 22 December 2023 - comes into operation on 1 January 2024 and applies in respect of years of assessment commencing on or after that date (section 26(2))] |
| (iv) | any qualifying distribution as defined in section 25BB that is deductible under subsection (2) of that section; |
Provided that the result of the calculation may not be less than zero;
[Section 23M(1) proviso inserted by section 26(1)(c) of the Taxation Laws Amendment Act, 2023 (Act No. 17 of 2023), Notice No. 4226, GG49894, dated 22 December 2023 - comes into operation on 1 January 2024 and applies in respect of years of assessment commencing on or after that date (section 26(2))]
[Definition substituted by section 19(1)(a) of the Taxation Laws Amendment Act, 2021 (Act No. 20 of 2021), Notice No. 770, GG45787, dated 19 January 2022 - comes into operation on 31 March 2023 and applies in respect of years of assessment ending on or after that date (per section (10) of the Rates and Monetary Amounts and Amendment of Revenue Laws Act, 2022 (Act No. 19 of 2022), Notice No. 1540, GG47825, dated 5 January 2023)]
[Definition deleted by section 19(1)(b) of the Taxation Laws Amendment Act, 2021 (Act No. 20 of 2021), Notice No. 770, GG45787, dated 19 January 2022]
means a relationship where a person, whether alone or together with any one or more persons that are connected persons in relation to that person directly or indirectly hold at least 50 per cent of the equity shares or can exercise at least 50 per cent of the voting rights or participation rights, in a company;
[Definition substituted by section 26(1)(d) of the Taxation Laws Amendment Act, 2023 (Act No. 17 of 2023), Notice No. 4226, GG49894, dated 22 December 2023 - comes into operation on 1 January 2024 and applies in respect of years of assessment commencing on or after that date (section 26(2))]
means a person to whom a ‘debtor’ owes a ‘debt’;
[Definition inserted by section 26(1)(e) of the Taxation Laws Amendment Act, 2023 (Act No. 17 of 2023), Notice No. 4226, GG49894, dated 22 December 2023 - comes into operation on 1 January 2024 and applies in respect of years of assessment commencing on or after that date (section 26(2))]
includes any amount in respect of which interest is determined or incurred, and such amount must be regarded as owed, but does not include a tax debt as defined in section 1(1) of the Tax Administration Act;
[Definition inserted by section 19(1)(d) of the Taxation Laws Amendment Act, 2021 (Act No. 20 of 2021), Notice No. 770, GG45787, dated 19 January 2022 - comes into operation on the date on which the rate of tax in respect of the taxable income of a company is first reduced after announcement by the Minister of Finance in the annual National Budget and applies in respect of years of assessment commencing on or after that date (section 19(2))]
means a person that incurs an amount of interest and—
| (a) | is a resident; or |
| (b) | in the case of a person that is not a resident, owes a debt that is effectively connected with a permanent establishment of that person in the Republic; |
[Definition substituted by section 19(1)(e) of the Taxation Laws Amendment Act, 2021 (Act No. 20 of 2021), Notice No. 770, GG45787, dated 19 January 2022 - comes into operation on the date on which the rate of tax in respect of the taxable income of a company is first reduced after announcement by the Minister of Finance in the annual National Budget and applies in respect of years of assessment commencing on or after that date (section 19(2))]
means interest as defined in section 24J, and includes—
| (a) | amounts incurred or accrued under any ‘interest rate agreement’ as defined in section 24K(1); |
| (b) | any finance cost element recognised for purposes of IFRS in respect of any lease arrangement that constitutes a finance lease as defined in IFRS16; |
| (c) | amounts taken into account in determining taxable income in terms of section 24I(3) and (10A); and |
| (d) | any amount deemed to be interest under section 24JA, |
but excludes any amount that is deemed to be a dividend in specie as contemplated in sections 8F and 8FA
[Definition substituted by section 19(1)(f) of the Taxation Laws Amendment Act, 2021 (Act No. 20 of 2021), Notice No. 770, GG45787, dated 19 January 2022 - comes into operation on the date on which the rate of tax in respect of the taxable income of a company is first reduced after announcement by the Minister of Finance in the annual National Budget and applies in respect of years of assessment commencing on or after that date (section 19(2))]
[Definition deleted by section 39(a) of the Taxation Laws Amendment Act, 2017 (Act No. 17 of 2017)];
means—
| (a) | a bank; or |
| (b) | a foreign bank that is comparable to a bank, |
contemplated in the Banks Act;
[Definition substituted by section 26(1)(f) of the Taxation Laws Amendment Act, 2023 (Act No. 17 of 2023), Notice No. 4226, GG49894, dated 22 December 2023 - comes into operation on 1 January 2024 and applies in respect of years of assessment commencing on or after that date (section 26(2))]
means—
| (a) | the right to participate in all or part of the benefits of the rights (other than voting rights) attaching to a share, or any interest of a similar nature, in a company; or |
| (b) | in the case where no person has any right in that company as contemplated in paragraph (a) or no such rights can be determined for any person, the right to exercise any voting rights in that company; |
[Definition inserted by section 19(1)(g) of the Taxation Laws Amendment Act, 2021 (Act No. 20 of 2021), Notice No. 770, GG45787, dated 19 January 2022 - comes into operation on the date on which the rate of tax in respect of the taxable income of a company is first reduced after announcement by the Minister of Finance in the annual National Budget and applies in respect of years of assessment commencing on or after that date (section 19(2))]
[Definition deleted by section 19(1)(h) of the Taxation Laws Amendment Act, 2021 (Act No. 20 of 2021), Notice No. 770, GG45787, dated 19 January 2022]
| (2) | Where an amount of interest is incurred by a debtor during a year of assessment in respect of a debt owed to— |
| (a) | a creditor that is in a controlling relationship with that debtor; |
| (b) | a creditor that is not in a controlling relationship with that debtor, if that creditor obtained the funding for the debt advanced to the debtor from a person that is in a controlling relationship with that debtor; |
| (c) | a creditor that is not in a controlling relationship with that debtor, if that creditor forms part of the same group of companies as that debtor if the expression ‘at least 70 per cent of the equity shares in' in paragraphs (a) and (b) of the definition of ‘group of companies’ in section 1 were replaced by the expression ‘more than 50 per cent of the equity shares or voting rights in; or |
| (d) | a creditor that is in a controlling relationship with that debtor, if that creditor, directly or indirectly through another creditor that is in a controlling relationship with that creditor, obtained the funding for the debt advanced to the debtor from a person that is in a controlling relationship with that creditor or that other creditor; |
[Section 23M(2)(c) and (d) inserted by section 19(1)(i) of the Taxation Laws Amendment Act, 2021 (Act No. 20 of 2021), Notice No. 770, GG45787, dated 19 January 2022 - comes into operation on 1 January 2024 and applies in respect of amounts of interest incurred on or after that date - deemed to have come into operation on 12 December 2013 (section 37(1) and (2)) of the Taxation Laws Amendment Act 2022 (Act No. 20 of 2022), Notice No. 1541, GG47826, dated 5 January 2023]
and the amount of interest so incurred or related interest is not during that year of assessment—
[Words preceding subparagraph (i) substituted by section 19(1)(j) of the Taxation Laws Amendment Act, 2021 (Act No. 20 of 2021), Notice No. 770, GG45787, dated 19 January 2022]
| (i) |
| (aa) | subject to tax in the hands of the person, creditor or other creditor referred to in paragraphs (a), (b), (c) or (d), to which the interest or related interest accrues; or; |
[Section 23M(2)(i)(aa) substituted by section 26(1)(g) of the Taxation Laws Amendment Act, 2023 (Act No. 17 of 2023), Notice No. 4226, GG49894, dated 22 December 2023 - comes into operation on 1 January 2024 and applies in respect of years of assessment commencing on or after that date (section 26(2))]
| (bb) | included in the net income of a controlled foreign company as contemplated in section 9D in the foreign tax year of the controlled foreign company commencing or ending within that year of assessment; and |
| (ii) | disallowed under section 23N, |
the amount of interest allowed to be deducted may not exceed the amount determined in accordance with subsection (3): Provided that where any amount of interest incurred or related interest is not included in the income of the person referred to in paragraph (i)(aa), and withholding tax on interest was or will be levied on that amount of interest, on payment thereof, under the provisions of Part IVB of this Chapter, the amount of interest to be regarded as not subject to tax as contemplated in paragraph (i)(aa) will be determined in accordance with the formula:
A = B x (C-D)
C
in which formula—
| (i) | ‘A’ represents the amount to be determined; |
| (ii) | ‘B’ represents the aggregate of any amount of interest incurred or paid in respect to which the provisions of Part IVB of this Chapter are or will be applicable; |
| (iii) | ‘C’ represents the number 15; and |
| (iv) | ‘D’ represents the rate at which withholding tax on interest has been or will be levied on such amount of interest under the provisions of Part IVB of this Chapter, multiplied by the number 100. |
[Words following paragraph (ii) proviso substituted by section 26(1)(h) of the Taxation Laws Amendment Act, 2023 (Act No. 17 of 2023), Notice No. 4226, GG49894, dated 22 December 2023 - comes into operation on 1 January 2024 and applies in respect of years of assessment commencing on or after that date (section 26(2))]
| (3) | The amount of interest allowed to be deducted in respect of all debts owed as contemplated in subsection (2), in respect of any year of assessment must not exceed the sum of— |
| (a) | the amount of interest received by or accrued to the debtor; and |
| (b) | an amount determined by multiplying the adjusted taxable income of that debtor for that year of assessment by 0,3, |
reduced by so much of any amount of interest incurred by the debtor in respect of debts not contemplated in subsection (2) as exceeds any amount not allowed to be deducted in terms of section 23N.
[Section 23M(3) substituted by section 19(1)(m) of the Taxation Laws Amendment Act, 2021 (Act No. 20 of 2021), Notice No. 770, GG45787, dated 19 January 2022 - comes into operation on the date on which the rate of tax in respect of the taxable income of a company is first reduced after announcement by the Minister of Finance in the annual National Budget and applies in respect of years of assessment commencing on or after that date (section 19(2))]
| (4) | So much of any amount of interest as exceeds the amount determined in terms of subsection (3) may be carried forward to the immediately succeeding year of assessment and, subject to subsection (2), must be deemed to be an amount of interest incurred in that succeeding year of assessment. |
| (5) | Where an amount of interest is to be taken into account in terms of this section and in terms of section 23N, that amount of interest shall only be taken into account in terms of this section after section 23N has been applied. |
[Section 23M(5) substituted by section 37(1)(g) of the Taxation Laws Amendment Act, 2014 (Act No. 43 of 2014)]
| (6) | This section does not apply to so much of the interest as is incurred by a debtor in respect of a debt owed to a creditor as contemplated in subsection (2) where— |
| (i) | that creditor funded that debt amount advanced to that debtor with funding granted by a lending institution that is not in a controlling relationship with that debtor; and |
| (ii) | [Section 23M(6)(ii) deleted by section 76(1) of the Taxation Laws Amendment Act 2020, GG44083, dated 20 January 2021 - comes into operation on 1 January 2022 and applies in respect of amounts incurred on or after that date - deemed to have come into operation on 18 December 2017 (section 76(2))] |
[Section 23M(6) comes into operation on 1 January 2025 and applies in respect of amounts of interest incurred on or after that date - deemed to have come into operation on 12 December 2013 (section 63(1) and (2) of the Taxation Laws Amendment Act, 2023)]
| (6A) | This section does not apply to interest incurred on a loan utilised for mining purposes during any period prior to the commencement of production or during any period of non-production, as contemplated in paragraph (b) of the definition of ‘capital expenditure’ in section 36(11). |
[Section 23M(6A) inserted by section 12(1) of the Taxation Laws Amendment Act, 2022 (Act No. 20 of 2022), Notice No. 1541, GG47826, dated 5 January 2023 - comes into operation on 31 March 2023 and applies in respect of years of assessment ending on or after that date (section 12(2))]
| (7) | For purposes of this section any exchange difference— |
| (a) | deducted from the income of a person as contemplated in section 24I(3) or (10A) is deemed to have been incurred by the person; or |
| (b) | included in the income of a person as contemplated in section 24I(3) or (10A) is deemed to have accrued to that person. |
[Section 23M(7) substituted by section 26(1)(i) of the Taxation Laws Amendment Act, 2023 (Act No. 17 of 2023), Notice No. 4226, GG49894, dated 22 December 2023 - comes into operation on 1 January 2024 and applies in respect of years of assessment commencing on or after that date (section 26(2))]