Are interest - free loans a taxable benefit?

ARE INTEREST-FREE LOANS A TAXABLE BENEFIT?
BDO Spencer Steward comments on a recent alarming tax judgment

A tax judgment on 13 September 2007 in the Supreme Court of Appeal of South Africa (SARS v Brummeria Renaissance (Pty) Ltd (2007) SCA 99 (RSA)) has created uncertainty and alarm regarding the tax implications of interest-free loans.

In short: Is it possible to deem an accrual in the hands of a taxpayer who received the "benefit" of an interest-free loan?  Should taxpayers and tax consultants panic as a result of this recent judgment?

Anton Kriel, tax director at BDO Spencer Steward Service (Cape) (Pty) Ltd believes that at least for now, that there is no reason to be alarmed if an interest-free loan is without a quid pro quo (without a consideration for the receipt, or use, of the loan free of interest).

"Our view is based on the conclusion that the facts that resulted in this judgment are very specific they clearly indicate that a barter transaction was entered into."

In this case, the court came to the conclusion that a deemed accrual took place because of the fact that the taxpayer had the benefit of not paying any interest on amounts it received as an interest-free loan. This judgment is fundamental, especially in relation to all those taxpayers who have the "benefit" of not paying interest on loan accounts.

Does this principle apply to all persons to whom interest-free loans are made?

Kriel says the facts of the case are very specific:  The recipient of the interest-free loan in this case provided a quid pro quo to the persons who advanced the loan to him (the recipient of the interest-free loan provided, to the persons who advanced the loans to him, a consideration in the form of the "free" use of residential units). In essence the transaction was a barter transaction. It is submitted that this fact will distinguish this case from most other interest-free loans.
 
"Our view is that even though the judgment is wide, it should be read and interpreted based on the facts of the case. A general application of this judgment would make a mockery of the principle that a person cannot be taxed on notional income. We hope that SARS will release its official view on this matter soon, preferably by means of an interpretation note."

In the majority of cases where interest-free loans are received (e.g. loans to family and investment trusts or to businesses), no consideration is provided in return for the use of the capital on loan-account, free of interest. This will, indeed and hopefully, shelter the majority of taxpayers from being taxed on the "benefit" of not paying interest on a loan.

Taxpayers who are in receipt of interest-free loans should not summarily start paying interest on these loans. At least not until SARS publicly announces its interpretation of this case to apply to all interest-free loans.