Analysis: The Tax Treatment of Interest in Kind: The Brummeria Case Revisited?

• Jurisdiction: South Africa
• Published date: 20 September 2020
• Date: 20 September 2020
• Pages: 435-455
• Citation: (2019) 31 SA Merc LJ 435
• Author: Rudd, R.

Analysis

THE TAX TREATMENT OF INTEREST IN

KIND: THE BRUMMERIA CASE REVISITED

REINHARD RUDD*

Senior lecturer, School of Accounting, University of the Witwatersrand

IINTRODUCTION

The tax treatment of interest has often been disputed in court. Before the

introduction of section 24J of the Income Tax Act 58 of 1962 (‘the Act’),

a number of judgments, often with widely varying and even contradic-

tory views, were handed down relating to matters such as the timing of

the accrual or incurral of interest, its source, the deductibility of interest

in general, as well as what actually constitutes interest (ITC 1496

(1991) 53 SATC 229; ITC 1587 (1994) 57 SATC 97; ITC 1588 (1994) 57

SATC 148; CIR v Genn & Co (Pty) Ltd 1955 (3) SA 382 (A); CIR v Lever

Brothers & Unilever Ltd (1946) 14 SATC 1; Cactus Investments (Pty)

Ltd v CIR 1999 (1) All SA 345 (A)).

Section 24J was introduced in 1995 in order somewhat to standardise

the tax treatment of interest in so far as it relates to the timing of its

accrual, as well as when it is incurred (National Treasury, ‘Explanatory

Memorandum on the Income Tax Bill 1995’ 7). The section also

contains the only def‌inition of ‘interest’ in the Act. In subsequent

amendments, the section became a charging section in its own right,

which provides for a deduction of interest or its inclusion in gross

income in certain circumstances (National Treasury, ‘Explanatory

Memorandum to the Taxation Laws Amendment Bill 2004’ 22). Section

24J(10) specif‌ically includes amounts paid or received in kind, rather

than in cash, in the scope of the section.

In the well-known case, CSARS v Brummeria Renaissance (Pty) Ltd &

others 69 SATC 205, the court had to rule on whether interest-free loans

granted by the occupants of units in a retirement village constituted

gross income to the borrower. What distinguished the interest-free loans

from those ordinarily granted was that they were given in exchange for

granting the occupants the lifelong right of occupation of the units. The

*CA(SA) BCom Hons.

435

(2019) 31 SA Merc LJ 435

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court held that the right to retain loan capital interest-free had an

ascertainable monetary value that accrued to the taxpayer and therefore

had to be included in gross income.

The basis for the conclusion reached in the case was, therefore, that no

interest was charged on the loans. What was not considered by the court,

however, is whether the lifelong rights of occupation granted to the

tenants in exchange for the loans do not in themselves constitute

interest, which would mean that the loans were actually not interest-free

at all. The fact that section 24J(10) specif‌ically provides that section 24J

applies to amounts paid or received in a form other than cash, indicates

that interest does not necessarily have to be paid in cash but can also

consist of payments in kind.

If this is the case, and the lifelong occupation rights granted to the

tenants constitute interest, the conclusion reached in Brummeria was

incorrect and in conf‌lict with the provisions of section 24J, as well as the

other provisions in the Act that apply to interest.

This analysis considers whether the conclusion reached in Brummeria

was correct, taking into account the meaning of the word ‘interest’ in the

context of the Act. Consideration will be given to whether ‘interest’

includes amounts in a form other than cash, not only in the context of

section 24J, but also in terms of the general provisions of the Act.

Furthermore, the applicability of the relevant provisions of the Act

relating to interest is considered in the context of Brummeria.

At the outset a brief overview of the facts and outcome of Brummeria

is provided, followed by a discussion of the meaning of the word

‘interest’ in the Act, as well as the tax implications thereof. Finally, the

analysis considers whether the lifelong occupation rights granted to the

lenders in exchange for the loans in Brummeria did, in fact, constitute

interest and should, therefore, have been taxed accordingly.

II OVERVIEW OF THE BRUMMERIA CASE

In Brummeria, the respondents were three companies that developed

retirement villages. Before the construction of a retirement unit, each

company would enter into an agreement with the potential occupant in

terms of which the company obtained an interest-free loan from the

potential occupant as a means of f‌inancing the construction of the unit.

Ownership of the unit would remain with the company, while the

lifelong right of occupation of the unit was granted to the lender. The

loan had to be repaid to the lender either upon the cancellation of the

agreement or upon the death of the occupant. The agreements entered

into with the occupants stipulated that the interest-free loans consti-

tuted consideration for the life rights granted.

(2019) 31 SA MERC LJ

436

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