Holding-Company Deductions

• Author: Michael Rudnicki Rudnicki
• DOI: 10.10520/ejc-btclq_v13_n3_a3
• Published date: 01 September 2022
• Date: 01 September 2022
• Pages: 7-14

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© Siber ink

Holding-Company Deductions:

are they doomed?

MICHAEL RUDNICKI*

ABSTRACT

The deductibility of expenditure incurred by holding companies is often a

contentious issue, particularly where expenditure, usually interest costs,

exceeds taxable income, usually in the form of interest.

The deduction of expenditure must meet the ‘carrying on of trade’ test

with reference to either section 11(a) of the Income Tax Act or section 24J,

the latter being applicable to interest.

The article summarises relevant principles from older tax cases applicable

to taxpayers carrying on money-lending activities to more recent case law,

applying the older principles in order to argue the deduction of expenses,

including interest, against interest income in the context of ‘trade’.

The degree of risk attendant to particular ventures may go too far to

constitute a ‘trade’, as def‌ined. But the expectation of prof‌it has often been

regarded as a cornerstone in determining whether a trade is carried on. This

assertion though is premised on the degree of commercial expediency in

relation to the ultimate objective of the business of the taxpayer.

In Solaglass Finance Company (Pty) Ltd v CIR 1991 (A), 53 SATC 1, the

court summarised the key elements of a moneylenders’ activities. Albeit that

the analysis was required to address the capital versus revenue nature of the

taxpayer’s losses, it is submitted that the analysis forms an adequate assess-

ment of whether or not a taxpayer carries on a trade. Some of the features

in the analysis are: the level of activity of the taxpayer, a system or plan

that displays a degree of continuity, including a continuous desire to earn a

margin, and obtaining security.

What is interesting in later court decisions in 2005 and in 2022, is that

the principal guidelines set out in the earlier judgements relating to money-

lenders, in summary: continuity, a system or plan and the generation of

prof‌it, were applied in assessing the deductibility of interest and in particular

whether the interest was incurred as a deduction from income derived from

the carrying on of a trade.

So what must be considered is where holding companies engage as the

source of funding, and the application thereof. In isolation, the company

must be able to demonstrate a continuous system or plan in which money

is borrowed and advanced, at prof‌it, to group entities. Often experts are

employed in holding companies in larger groups to manage the treasury

function, or if such experts reside within the group, an appropriate charge

is levied. The anticipation of prof‌its is of paramount importance. The diff‌i-

culty here often lies in underlying subsidiaries meeting cash f‌low or liquidity

constraints thereby being unable to settle the debt plus interest costs. A

system or plan should be agreed upon to deal with these issues. A mere

reduction of the interest rate to affected subsidiaries will not, it is submitted,

meet the trade test in section 24J nor in section 23(g) of the Act.

* Tax Executive, Bowmans Attorneys .