Tax Alert: SARS Interpretation Note on “Similar Finance Charges” – Implications for Financing Fees

When taxpayers obtain funding, particularly for large capital projects, the financing arrangement often gives rise to various charges in addition to interest. These may include raising fees, front-end fees, upfront fees, guarantee fees and commitment fees. The deductibility of these amounts must generally be considered within the framework of section 24J, section 11(a), section 11(c), and section 23H of the Income Tax Act 58 of 1962 (“ITA”).

Broadly speaking, section 24J regulates the timing and deductibility of interest, while section 11(a) governs the deductibility of expenditure and losses incurred in the production of income. An important distinction between these provisions relates to the capital versus revenue nature of the expenditure. Section 11(a) permits a deduction only where the relevant amount is not of a capital nature. Section 24J, however, does not impose this limitation, which means that certain amounts connected to capital funding may nevertheless qualify for a deduction if they constitute interest or “similar finance charges” as contemplated in that section.

In circumstances where funding is obtained for capital projects forming part of a taxpayer’s income-earning structure, the capital limitation under section 11(a) may prevent a deduction. In certain cases, however, section 24J may allow a deduction where the charges incurred in relation to the funding constitute “similar finance charges”.

Recent developments concerning the interpretation of “similar finance charges” for the purposes of section 24J of the ITA have introduced some uncertainty regarding the tax treatment of certain financing fees. These developments arise from the interaction between the Tax Court judgment in ITC 76795 (13 January 2025) and the Interpretation Note issued by the South African Revenue Service (“SARS”) on 12 December 2025.

Tax Court Interpretation – ITC 76795

The Taxpayer Trust v Commissioner for the South African Revenue Service ITC 76795 [2025] ZATC1 (13 January 2025) is the first reported case specifically examining the interpretation of the definition of “interest” in section 24J, which now includes “similar finance charges” following its 2016 amendment from “Interest or related finance charges”.

In this case, SARS argued that raising fees should possess the fundamental characteristics of common-law interest in order to qualify as similar finance charges. According to SARS, raising fees were distinguishable from interest because they were incurred before the effective date of the loan agreements and were required to be paid before the taxpayer could obtain the benefit of the funding. SARS therefore argued that the fees did not constitute compensation for the use of money. SARS further argued that although the raising fees were calculated as a percentage of the loan amount, they were not determined with reference to the time value of money or the outstanding loan balance during the term of the loan.

The Tax Court rejected this approach. The Court stated that the raising fees formed part of the overall compensation payable for the loans, as the taxpayer would not have obtained the benefit of the funding without paying these fees. The Court found that this close connection between the fees and the loan funding indicated a sufficient similarity between raising fees and interest.

The Court further stated that it would appear that SARS agree that there is a similarity between the determination of raising fees and the determination of interest, but SARS considered the dissimilarity, i.e. the fact that raising fees are not determined with reference to the time value of money or the outstanding loan balance, to nullify the similarity.  In this sense SARS’ view is that “similarity” should be interpreted as “sameness” for purposes of the definition of interest in section 24J.  The Court further noted that the use of ‘includes’ expands the definition of interest for purposes of section 24J. Further, the Court notes that the term ‘similar’ ‘and its various iterations connotates resemblance of some sort’, but that ‘similar’ must not be conflated with ‘sameness’ or the phrase ‘identical to’.

SARS’s Interpretation Note 142 (12 December 2025)

Subsequent to the judgment, SARS issued an Interpretation Note on 12 December 2025 addressing the meaning of “similar finance charges” in section 24J. In the Interpretation Note, SARS adopts a narrower interpretation of the phrase. SARS states that the expression must be interpreted with reference to its wording, context and purpose, and that it therefore refers only to charges that are similar in nature to interest, in other words it must be of the same kind or nature.

SARS further indicates that such charges must arise in terms of or in respect of a financial arrangement, meaning that they must form part of the arrangement itself. According to SARS, the phrase “similar finance charges” is not intended to operate as a catch-all for all costs associated with financing transactions. SARS  notes that fees charged for granting, approving, arranging or administering a financial arrangement may be connected to the financing transaction, but are very different to the nature of interest as they do not constitute compensation for the use of funds and therefore should not qualify as charges similar to interest.

It is important to remember that SARS Interpretation Notes guide taxpayers on the application of tax legislation and may constitute “practice generally prevailing” under the Tax Administration Act. However, they do not have the force of law and merely reflect SARS’s interpretation of the relevant provisions. Accordingly, they may be challenged through the dispute resolution process, including objection and court proceedings. While not binding on the courts, adherence to an Interpretation Note generally prevents SARS from adopting a contrary position in respect of the taxpayer.

Key Takeaways and Conclusion

The interpretation of “similar finance charges” for purposes of section 24J remains an evolving area of South African tax law. The Tax Court in ITC 76795 adopted a broader interpretation that could support the deductibility of certain financing fees, whereas SARS’s Interpretation Note issued on 12 December 2025 reflects a narrower view and suggests that SARS may challenge deductions for fees it does not consider sufficiently similar to interest.

Given that SARS has lodged an appeal against the Tax Court decision, further clarity may emerge once the matter is considered by a higher court. In the meantime, taxpayers should ensure that the tax treatment of financing-related fees is carefully evaluated, particularly in circumstances where funding has been obtained for capital projects or where significant upfront or arrangement fees have been incurred.

We advise taxpayers to obtain a tax opinion from a registered tax practitioner to support their position on finance-related fees, which will help protect them from penalties if SARS adopts a different view on the treatment of these fees. If you would like assistance with reviewing financing arrangements, assessing the deductibility of financing charges, evaluating the potential tax risks arising from these developments, or obtaining a tax opinion on the correct tax treatment of the fees incurred, please feel free to contact our team. We would be pleased to assist you in navigating this evolving area of tax law.