use of interest-free loans is taxable, appeal court rules
17 September 2007

The Supreme Court of Appeal ruled yesterday that the right to use loans interest-free is “gross income” which forms part of a company’s taxable income.

The appeal court ruled in favour of the South African Revenue Service (SARS), holding that the receiver had correctly assessed three companies for tax on the basis that the right to use loans interest-free had a money value and formed part of taxable income.

In the case in question, three companies, Brummeria Renaissance, Palms Renaissance, and Randpoort Renaissance, developed retirement villages. The companies obtained interest-free loans to build units in exchange for granting life occupation rights of the units to the lenders.

SARS assessed the companies to tax, then revised the assessments and subsequently issued further revised assessments to the entities. It was the further revised assessments that were at issue in the matter.

The companies called a witness who testified that the interest-free loans were used solely for the purpose of financing by the entities for the development of various units; that nothing was invested in income-earning investments; and that repayment of a loan was financed by the granting of a new loan.

The companies contended in the Johannesburg Tax Court that the loans did not result in any amounts being received by them as contemplated by the definition of “gross income” contained in the Income Tax Act. They argued that the provisions of the act precluded SARS from raising further revised assessments.

The tax court upheld the appeals by the company and granted SARS leave to appeal to the Supreme Court of Appeal. SARS contended that the right to retain and use the borrowed funds without paying interest had a money value.

The value of such right had to be included in the companies’ gross income for the years in which such rights accrued to the companies. The appeal court held that although a loan was not income, the value of the right to use a loan interest-free was.

The Supreme Court of Appeal also held that where SARS had raised an original assessment, and thereafter a revised assessment to which the taxpayer had successfully objected in full, the receiver could not raise a further assessment more than three years after the original assessment. However, the provision contained in the Income Tax Act does not protect a taxpayer guilty of fraud, misrepresentation, or non-disclosure of material facts.

Sanchia Temkin, www.businessday.co.za