A Win for Borrowers: What the SCA's Ruling on Raising Fees Means for Taxpayers
The Supreme Court of Appeal (SCA) has handed South African taxpayers a significant victory against SARS. The case turned on a question that sounds dry but carries real money: can you deduct the fees a lender charges you for making a loan available? For the taxpayer in this case, and for many others who borrow heavily, the answer is yes.
What the fight was about
When you borrow a large sum, the lender often charges more than interest. There's usually an upfront charge, known as a raising fee, arrangement fee or facility fee, typically calculated as a percentage of the loan amount.
The question for the court was whether those fees can be deducted for tax purposes under section 24J of the Income Tax Act, which allows deductions on "interest or similar finance charges." The catch is that the Act doesn't define what counts as a "similar finance charge." That gap has caused headaches for years, particularly for capital-intensive sectors like property investment, infrastructure development, renewable energy and private equity.
The case: Cornucopia Trust
The dispute involved Cornucopia Trust, a Bloemfontein-based property investment trust. It secured substantial funding from Sanlam Group entities to acquire and refinance commercial properties, and paid upfront raising fees of about 2% of the value of the loan facilities.
SARS accepted that the raising fees were finance charges but refused the deduction. Its argument was that they weren't sufficiently "similar to interest" to qualify under section 24J.
SARS's argument
The wording in the Act was changed in 2016, from "interest or related finance charges" to "interest or similar finance charges." SARS argued this was meant to narrow what could be deducted, and to shut out fees like these. In its view, a raising fee is a once-off payment, made before the loan agreement takes effect, that pays for arranging the loan rather than for using the borrowed money.
Why the court disagreed
The SCA accepted that the 2016 amendment was intended to narrow the provision, but it still rejected SARS's reading. Its reasoning rested on a few points:
- The fee is tied to the loan amount. It's calculated on what is borrowed.
- It's necessary to get the money. Without paying it, there's no loan.
- It's part of the price of credit. The court found the fees weren't just payment for arranging the facilities but formed part of the consideration for the provision of credit itself.
- Lenders can swap fees and interest. A facility could carry a higher interest rate and a lower raising fee, or the reverse, and end up in substantially the same place commercially.
That last point carried particular weight. If a lender can dial one up and the other down to reach the same outcome, it's hard to argue that one is "interest" and the other something entirely different. The court concluded the fees were sufficiently similar to interest, and therefore deductible under section 24J.
Why it matters
Tax Consulting SA called the ruling a major victory that goes beyond a technical point of interpretation. Deductibility directly affects the after-tax cost of borrowing and the economics of debt-funded deals. In the group's words, sectors that depend heavily on external funding now have important authority to rely on when deducting financing charges that share the functional characteristics of interest.
Broadly, any taxpayer relying heavily on debt financing and refinancing could have been hurt by SARS's narrow reading. This judgment pushes back on it.
Don't treat it as a blank cheque
Tax Consulting also cautioned against reading the ruling too broadly. The court drew a line between raising fees and more peripheral costs such as legal fees, advisory costs and administrative charges. Those are not covered by this reasoning.
So the burden stays on the taxpayer. As Tax Consulting put it, you'll still need to show that a particular fee forms part of the cost of obtaining credit, rather than merely facilitating the transaction.
The takeaway
If your business borrows, look at how your lender's charges are structured. Fees that are calculated on the loan amount, are required to access the funds, and work as part of the lender's compensation for providing credit now have strong support for deductibility. Fees for professional help around the deal do not.
As always, the specifics of your arrangement matter, so speak to a qualified tax adviser before changing how you treat these costs.
Source: Supreme Court of Appeal ruling in the Cornucopia Trust matter, as reported with commentary from Tax Consulting SA.
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