Source: INTERPRETATION NOTE 142 dated 12 December 2025
References Acts: INCOME TAX ACT 58 OF 1962, Paragraph (a) of the definition of “INTEREST” IN SECTION 24J(1), MEANING OF “SIMILAR FINANCE CHARGES”
Background
Taxpayers are often party to financial arrangements when obtaining or granting loan or debt funding. Under these arrangements, the lender normally advances an amount to the borrower, who is obliged to repay an amount that includes the amount advanced and interest (often calculated as a percentage of the loaned amount). Various finance charges, for example, loan application fees, service fees, administration fees, structuring fees and raising fees, are often also payable by a borrower to the lender. The finance charges mentioned are not an exhaustive list of charges that may be charged on loan or debt funding.
Broadly, section 24J(2) deems a taxpayer to have incurred an amount of interest equal to the relevant accrual amounts in the particular year of assessment in respect of an instrument, or determined according to the alternative method, to be deductible from the income of a taxpayer if certain definitions, provisions and requirements are met.
Interest for purposes of section 24J includes, amongst others, amounts constituting “interest“ and “similar finance charges”. Uncertainty exists as to whether the finance charges referred to above qualify as “similar finance charges” in section 24J(1).
In the SARS Interpretation Note, unless the context indicates otherwise:
- “borrower” means, in relation to any instrument, any person who has incurred any interest or has any obligation to repay any amount in terms of such instrument or who would be liable to pay such interest if it was due and payable;
- “instrument” means an “instrument” as defined in 4;
- “interest” means “interest” as defined in section 24J(1);
- “lender” means, in relation to any income instrument, any person who becomes entitled to any interest or amount receivable in terms of such instrument or who becomes entitled to receive payment of such interest if it was due and payable;
- “paragraph (a)” means paragraph (a) of the definition of “interest” in section 24J(1);
- “section” means a section of the Act;
- “similar finance charges” means similar finance charges contemplated in paragraph (a);
- “the Act” means the Income Tax Act 58 of 1962; and
- any other word or expression bears the meaning ascribed to it in the Act.
This Note considers the meaning of “similar finance charges” and, by way of example, considers the application of that meaning in assessing whether raising fees in respect of a financial arrangement falls within the ambit of “similar finance charges”. The meaning of “similar finance charges” is considered from the perspective of the borrower. However, the same principles apply when considering the term from the perspective of the lender.
The law
Paragraph (a) of the definition of “interest” in section 24J(1)
“24J. Incurral and accrual of interest— (1) For the purposes of this section, unless the context otherwise indicates:
“Interest” includes the: (a) gross amount of any interest or similar finance charges, discount or premium payable or receivable in terms of or in respect of a financial arrangement;…”
Application of the law
Broadly, section 24J regulates the timing of the incurral and accrual of interest over the term of instruments on a yield-to-maturity basis by deeming calculated amounts of interest to be incurred or to have accrued in relevant years of assessment. Section 24J not only regulates the timing but also grants a deduction for or requires an inclusion in gross income of interest if the requirements of the section are met. The amounts of interest incurred or accrued may differ from the actual amounts of interest paid or received during a particular year of assessment.
Under section 24J(2), amounts of interest, as calculated under section 24J for the borrower of an instrument, are deemed to be incurred and are deductible from the income of a taxpayer if certain requirements are met. Section 24J(5) provides, amongst others, that if an amount actually paid by a person in terms of an instrument is taken into account in calculating the amounts dealt with and granted a deduction under section 24J(2), no deduction will be allowable for such amount under section 11.
The term “instrument” is defined in section 24J(1) and means an interest-bearing arrangement or debt, an acquisition or disposal of a right to receive interest or the obligation to pay any interest in terms of any other interest-bearing arrangement, or a repurchase agreement or resale agreement. Lease agreements (excluding sale and leaseback agreements) and policies issued by long-term insurers do not, however, fall within this definition. An income instrument is a particular instrument defined in section 24J(1).
The term “interest” is widely defined in section 24J(1) and includes the items listed under paragraphs (a) to (c) of that definition. An amount that is payable in terms of, in respect of, or in connection with a financial arrangement is not automatically interest for purposes of section 24J. The amount must meet the definition of “interest” in section 24J(1) to be interest for the purposes of section 24J.
For purposes of this Note, paragraph (a) and more specifically “interest or similar finance charges … payable … in terms of or in respect of a financial arrangement” are of relevance.
The meanings of the terms “financial arrangement”, “interest” and “similar finance charges” are considered below.
Meaning of “financial arrangement”
The phrase “financial arrangement” is not defined in the Act, and its ordinary grammatical meaning should therefore be considered. The online Cambridge Dictionary defines the words “financial” and “arrangement” as “financial: relating to money or how money is managed”.
Arrangement
“a plan for how something will happen” or “an agreement between two people or groups about how something happens or will happen”. Lawinsider.com defines the phrase “financial arrangement” as “a debt or debt instrument or an arrangement under which a person receives money in consideration for the provision of money to any person, either at a future time or when an event occurs (or does not occur) in the future. Essentially, a financial arrangement is any transaction that involves deferral of the giving of consideration.” The phrase “financial arrangement” thus has a wide meaning and includes, for purposes of paragraph (a), a contractual arrangement involving finance or the obtaining or granting of credit of some kind.
Meaning of “interest” as contemplated in paragraph (a)
The ordinary grammatical meaning of “interest” must be considered given the reference to it in the definition of “interest”. The Merriam-Webster Dictionary defines “interest” as “a charge for borrowed money, generally a percentage of the amount borrowed.” Dictionary.com defines “interest” as “a sum paid or charged for the use of money or for borrowing money:”
The term “interest” has also been considered judicially. The following court cases give guidance on what is regarded as common law interest.
In Riches v Westminster Bank Limited, the following was stated in regard to interest by the House of Lords: “[T]he essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had the use of the money or, conversely, the loss he suffered because he did not have that use. The general idea is that he is entitled to compensation for that deprivation.”
In ITC 1496 Melamet J stated as follows: “Interest is an expense to compensate a lender for the time period during which the money is lent to a second party. It cannot be incurred prior to the time during which the money is used. It is incurred and accrues from day to day.”
An amount of interest remains interest irrespective of whether it is calculated with reference to a fixed or variable rate of interest or is payable or receivable in a lump sum or unequal instalments over the terms of the financial arrangement. Interest may be in the form of cash or kind, and it could be calculated using a fixed or variable rate of interest or on some other basis. The determination of whether an amount can be regarded as “interest” is fact dependent.
Meaning of “similar finance charges”
The phrase “finance charges” is not defined in the Act. The ordinary grammatical meaning of “finance charge” is “a fee charged for the use of credit or the extension of existing credit. It may be a flat fee or a percentage of borrowings, with percentage-based finance charges being the most common.”
According to Investopedia.com, “a finance charge is often an aggregated cost, including the cost of carrying the debt along with any related transaction fees, account maintenance fees, or late fees charged by the lender,” and “a finance charge is the total amount of money a consumer pays for borrowing money.” Common finance charges include interest rates, origination fees, service fees, late fees, and so on.”
Therefore, finance charges include, but are not limited to, loan application fees, monthly service fees, administration fees, structure fees, and raising fees (also commonly referred to as originating fees). Before the introduction of section 24J, a trend that had gained popularity was for financial instruments to be issued at a discount or to have interest, the payment of which was deferred. Certain borrowers claimed the discount or deferred interest as fully deductible in the year of issue; however, certain lenders claimed the amounts
were taxable only when the instrument matured. Additionally, there were conflicting judgements from the special court on the subject. Section 24J was accordingly introduced to address when interest is incurred by borrowers and accrued to lenders, that is, to address the timing of incurrals and accruals of interest. This was achieved by introducing an accrual basis that recognises the spreading of interest (including discounts and premiums) on a yield-to-maturity basis. The term “interest” was defined as including, amongst others, “interest and related finance charges” with the intention that finance charges of the same kind or nature as interest would be treated in the same manner as interest (as it is commonly understood) under section 24J.
There was no intention to broaden the meaning of interest to the extent that, for example, legal fees incurred on setting up a loan would, through the provisions of section 24J, be included as interest and be deemed to be incurred on a yield-to-maturity basis over the period of the loan. Even if those legal fees could be viewed as related to the loan, they are not related in kind to interest or interest by nature.
Before 2004 there were different views regarding whether interest was always of a revenue nature or whether, depending on the facts of a specific case, it was of a capital nature. To provide certainty on the tax treatment of interest and to introduce the principle that interest should be, and going forward would be, treated on revenue account, section 24J(2) and section 24J(3) were amended to, respectively, provide for a deduction from income or an inclusion in income, provided the requirements of those sections were met. There was no legislative intent with this amendment to broaden the definition of “interest” to include all finance charges related to the same loan. Finance charges other than “interest” as defined in section 24J would therefore still need to meet the requirements of section 11(a) or gross income before, as appropriate, qualifying for a deduction or being included in gross income.
To clarify the inclusion and meaning of the words “related finance charges” in paragraph (a), the definition was amended in 2016, and the word “related” was substituted with the word “similar”, resulting in the relevant portion of paragraph (a) being more focused and now reading “interest or similar finance charges”.
The word “similar” is not defined in the Act. According to its ordinary grammatical meaning in the Merriam-Webster Dictionary, “similar” means “having characteristics in common: strictly comparable”. The Cambridge Dictionary defines “similar” as “looking or being almost, but not exactly, the same”. Synonyms for “similar” include “nearly alike”, “close”, “comparable”, “like” or “akin”.
Having regard to the above, it is concluded that, irrespective of what a finance charge is called, finance charges resembling interest (either in kind or nature) without being identical to interest are regarded as similar finance charges. Therefore, the phrase “similar finance charges” does not include all forms of costs associated with acquiring and executing a loan and should not be interpreted and applied too widely. The relevant aspect of similarity that a finance charge must have with interest to be a “related finance charge” is that it must be of the same kind or nature.
For example, a monthly service fee levied for administering a loan account may be viewed by some as a finance charge, as it is a cost that is incurred in connection with the loan and therefore part of the total cost of borrowing. Administering the loan account for which the service fee is charged is very different from and distinguishable from the use of the funds loaned for which interest is charged. Accordingly, a monthly service fee is not a finance charge that is similar to interest. When determining whether a particular finance charge is a “similar finance charge” to interest and therefore included under paragraph (a), it is important to take the wording of the section, the above principles, and the purpose of section 24J into consideration.
The history and reason for the deletion of “related” and replacement with “similar” is also a relevant consideration.
The facts of each case will determine if a particular finance charge relating to a financial arrangement constitutes “interest” as defined in section 24J. A similar finance charge is interest, irrespective of whether it is calculated with reference to a fixed or variable rate of interest or is payable or receivable in a lump sum or unequal instalments over the terms of the financial arrangement. A similar finance charge may be in the form of cash or kind, and it could be calculated using a fixed or variable rate of interest or on some other basis.
Application of the principles above in assessing whether a raising fee, as an example, constitutes a “similar finance charge”
A raising fee is generally a fee payable to the lender or arranger of a loan in consideration for work done in providing or arranging the loan. Otherwise stated, when looking at the nature of the fee and what it is for, raising fees is typically related to the acquisition of capital and not for the use of money. Essentially, a raising fee is paid to the lender or a third party for initiating or setting up the financial arrangement.
The archived Income Tax Practice Manual provides the following helpful guidance on the distinction between interest and raising fees:
- Raising fees is a cost of raising capital, whilst interest is a payment for the use of capital.
- A raising fee is (generally) a one-off payment, whilst interest is normally a recurring payment.
- Interest is (generally) calculated by reference to time, whilst a raising fee is usually unrelated to time.
- Interest, even pre-production interest, is not an expense of a capital nature because of its recurring nature (whereas a raising fee may be of a capital or revenue nature).
A raising fee that is paid to obtain funds cannot be said to be similar to interest that is paid for the use of such borrowed funds. The nature of a raising fee, or, otherwise stated, what it is for, is very different from the nature of interest. A raising fee is typically a fee that a lender or third party charges for the work performed in relation to setting up the loan and is payable irrespective of what portion of the facility is ultimately borrowed and when it is repaid. Even if a raising fee is calculated and expressed in terms of a
rate (for example, 1% of capital borrowed), it is fundamentally distinct from interest, which is a payment for the use of borrowed money. A raising fee is not a charge of the same kind or character as “interest”. Consequently, a raising fee, as described above, is not a similar finance charge and does not constitute “interest” as defined in paragraph (a). It will therefore not qualify for a deduction under section 24J(2).
Regarding the words, context and the purpose of paragraph (a) and section 24J as a whole, this outcome aligns with the fact that it was not the intention of the legislature to include finance charges such as raising fees in “similar finance charges”. This is also evident in paragraph 20(2) of the Eighth Schedule to the Act, which refers to borrowing costs as “including interest as contemplated in section 24J, raising fees, bond registration costs or bond cancellation costs”. The legislature specified raising fees, bond registration costs and bond cancellation costs separately since these expenses were not included in “interest as contemplated in section 24J”.
Deductions under other sections of the Act
To determine whether finance charges in respect of a financial arrangement that are not similar to interest and do not qualify for a deduction under section 24J(2) are deductible under another provision of the Act, one has to consider the requirements of the relevant provision. Under the so-called general deduction formula in section 11(a), read with section 23(g), expenditure and losses actually incurred for purposes of trade and that are in the production of income may be deducted from income, provided such expenditure and losses are not of a capital nature.
The phrase “capital nature” is not defined in the Act, and although it has been held that the ordinary economic meaning should be attached to the word “capital”, it has not been possible to devise a definitive or all-embracing test despite the regularity with which the issue has arisen. The courts have provided some valuable guidelines to determine whether an expense is of a revenue or capital nature. Generally, expenditure incurred to perform income-earning operations is regarded as being of a revenue nature, and any expenditure incurred to establish, improve or add to the income-earning structure of a taxpayer’s business is capital in nature. There must also be a sufficiently close link between the expenditure and the taxpayer’s income-earning operations in order to conclude that it forms part of the cost of performing the taxpayer’s income-earning operations, rather than the cost of expanding the income-producing structure. Usually, if an asset that has an enduring benefit is created, the associated costs are of a capital nature.
When applying the above principles, a raising fee is often of a capital nature. As such, it is not deductible under section 11(a). Ultimately, the facts of each case must be considered on their merits when determining whether finance charges that are not similar to interest and are not deductible under section 24J are deductible under section 11(a).
In interpreting the phrase “similar finance charges”, one has to have regard to the wording used, its context, and its purpose. The phrase must therefore be interpreted to mean charges similar in kind or nature to “interest”. Furthermore, paragraph (a) stipulates that the charges contemplated must be “in terms of or in respect of a financial arrangement”. The charges therefore need to be part of the financial arrangement itself. The term “similar finance charges” is not a catch-all for all forms of costs associated with a financial arrangement. Amounts charged for the granting, approval or administration of a financial arrangement while being linked to the arrangement are not compensation for the use of the funds and are therefore not similar to interest.
Finance charges relating to a financial arrangement that do not qualify for a deduction under section 24J(2) may be deductible under section 11(a) depending on the facts of the case and whether the requirements of section 11(a), read with section 23(g), have been met.
The law
Definition of “instrument” in section 24J(1)(a)
“instrument” means:
(a) . . . . . .
(b) . . . . . .
(c) any interest-bearing arrangement or debt;
(d) any acquisition or disposal of any right to receive interest or the obligation to pay any interest, as the case may be, in terms of any other interest-bearing arrangement; or
(e) any repurchase agreement or resale agreement, which was:
(i) issued or deemed to have been issued after 15 March 1995;
(ii) issued on or before 15 March 1995 and transferred on or after 19 July 1995; or
(iii) in so far as it relates to the holder thereof, issued on or before 15 March 1995 and was unredeemed on 14 March 1996 (excluding any arrangement contemplated in subparagraphs (i) and (ii)), but excluding any lease agreement (other than a sale and leaseback arrangement as contemplated in section 23G) or any policy issued by an insurer as defined in section 29A;Definition of “interest” in section 24J(1)(a)
“Interest” includes the:
(a) gross amount of any interest or similar finance charges, discount or premium payable or receivable in terms of or in respect of a financial arrangement;
(b) amount (or portion thereof) payable by a borrower to the lender in terms of any lending arrangement as represents compensation for any amount to which the lender would, but for such lending arrangement, have been entitled; and
(c) the absolute value of the difference between all amounts receivable and payable by a person in terms of a sale and leaseback arrangement as contemplated in section 23G throughout the full term of such arrangement, to which such person is a party, irrespective of whether such amount is:
(i) calculated with reference to a fixed rate of interest or a variable rate of interest; or
(ii) payable or receivable as a lump sum or in unequal instalments during the term of the financial arrangement;