The Modified Section 23M

• Jurisdiction: South Africa
• Date: 01 March 2023
• Published date: 01 March 2023
• DOI: 10.10520/ejc-btclq_v14_n1_a4
• Pages: 24-31
• Author: Michael Rudnicki Rudnicki

24 © Juta and Company (Pty) Ltd

The Modif‌i ed Section 23M:

INTEREST DEDUCTION LIMITATIONS

MICHAEL RUDNICKI*

ABSTRACT

Section 23M of the Income Tax Act 58 of 1962 seeks to limit the deduction of

interest on debt arising between parties related to one another and in respect

of which the interest is not subject to tax in the hands of the recipient of the

interest.

Section 23M was amended in 2021 by the Tax Laws Amendment Act 20

of 2021 and is effective from years of assessment ending on or after 31 March

2023. The key amendments to the section deal with:

• Interest partially subject to tax.

• The amendment to the def‌i nition of ‘interest’, being the subject matter of

the limitation rules in the section.

In respect of interest partially subject to tax, i e a tax rate say of 5% in terms

of a double taxation agreement, the limitation rules will apply to that part

which is not subject to tax, i e 10% in the example given (being the 15%

withholding tax rate — 5% withholding tax limitation under the applicable

double taxation agreement).

The def‌i nition of ‘interest’ is expanded. The relevance of the def‌i nition’s

expansion is that all ‘interest’ payable to a related party (a ‘controlling rela-

tionship’ as def‌i ned) which is not subject to tax, could be limited in terms of

its deductibility.

The amended interest def‌i nition includes:

• Interest as contemplated in s24J of the Act: which includes common law

interest and other charges of a similar nature;

• Amounts incurred or accrued in respect of ‘interest rate agreements as

contemplated in section 24K of the Act;

• Any f‌i nance cost element recognised for purposes of IFRS in respect of any

lease agreement that constitutes a f‌i nance lease as def‌i ned in IFRS16;

• Foreign exchange gains and losses; and

• Amounts deemed to be interest in terms of Sharia compliant f‌i nancing

arrangements.

Accordingly, f‌i nance arrangements between related parties where the

‘interest’, as def‌i ned, is not subject to tax or is partially subject to tax may be

limited in terms of its deductibility.

Introduction

Section 23M of the Income Tax Act 58 of 1962 (‘the Act’) is an anti-avoid-

ance provision that limits the deduction of interest, in particular, in respect

of funding arrangements with creditors that are either not subject to tax

* Executive, Bowmans.