TAX

Rules for the taxation of interest payable by SARS under Section 7E of the Income Tax Act

I, for one, never wish to pay SARS more tax than necessary. In fact, we pay too much in comparison with worldwide averages. This article explains how Section 7E of the Income Tax Act prevents just that when SARS owe a taxpayer interest. Avoid double taxation at all costs.

This information is derived from a Binding General Ruling released by SARS; BGR number 53 and deals with avoidance of double taxation and was issued under section 89 of the Tax Administration Act 28 of 2011.

This BGR sets out the rules to avoid double taxation when:

• a deemed accrual of interest occurs under section 7E on or after 1 March 2018; and

• before that date either the whole or a part of that interest was included in the taxpayer’s gross income on the accrual basis.

SARS administers a number of tax Acts under which taxes, levies and duties are collected and paid into the National Revenue Fund. Interest may become payable by SARS in respect of these taxes, levies and duties under a variety of circumstances.

Section 7E was introduced to address the time of accrual of interest payable by SARS to a taxpayer. Section 7E came into operation on 1 March 2018 and applies to amounts of interest paid by SARS on or after that date. It stipulates that when a person becomes entitled to any amount of interest payable by SARS under a tax Act, that amount must be deemed to accrue to that person on the date on which the amount is paid to such person. The effect of section 7E is that interest payable by SARS is included in a taxpayer’s gross income only when the amount is actually paid and not when the amount accrues to a person under general principles.

Taxpayers are required to include in their gross income for a year or period of assessment the total amount, in cash or otherwise, received by or accrued to them or in their favour, other than receipts or accruals of a capital nature but subject to specified inclusions, whether or not of a capital nature. Residents must account for their worldwide receipts or accruals while non-residents must account only for receipts or accruals from a source within South Africa. The general rule is that an amount is included in a taxpayer’s gross income at the earlier of receipt or accrual and there is no right of election in this regard.

A consequence of the introduction of section 7E is that double taxation may arise if interest payable by SARS was included in gross income when it actually accrued based on general principles before the introduction of section 7E, and the same amount is included again in gross income in a subsequent year of assessment when it is deemed to accrue under section 7E.

Since there is a implication against double taxation in law, section 7E should not be interpreted as applying to interest that actually accrued under general principles before 1 March 2018 and was included in gross income before that date.

A taxpayer that did not include interest in gross income that accrued under general principles before 1 March 2018 and which is paid by SARS on or after that date must include this interest in gross income in the year of assessment in which it is paid under section 7E. SARS will not want to assess interest that actually accrued in earlier years of assessment in those earlier years if that interest was paid on or after 1 March 2018 and has been taxed as a deemed accrual under section 7E.

Outcome

For purposes of section 7E, interest paid to any person under a tax Act by SARS on or after 1 March 2018 must be included in that person’s gross income to the extent that the amount has not previously been included in gross income when it actually accrued to the person under general principles. A taxpayer bears the burden of proving that an amount of interest or a portion of such amount previously included in gross income corresponds with an amount of interest paid on or after 1 March 2018 such that section 7E will be interpreted as not applying to that amount or portion of that amount.

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