Judgment leaves questions unanswered

In 2007, the judgment of the Supreme Court of Appeal in the case of Commissioner for the South African Revenue Service v Brummeria Renaissance (Pty) Ltd was the cause of a great deal of concern for many taxpayers. It was found that, in the particular circumstances of the case, the use of interest free loans had a value that had to be included in gross income.

The concern that arose as a result of the Brummeria judgement was with regard to how widely the South African Revenue Service (SARS) would seek to apply the above principle to interest free loans. SARS indicated that it would release an interpretation note clarifying its position. A draft interpretation note setting out this position has now been released for public comment.

The draft interpretation note states that an interest free loan will fall to be included in gross income only where it constitutes a quid pro quo for goods supplied or services rendered. It is SARS’ view that interest free loans in other contexts would likely be of a capital nature and would therefore not be included in gross income. In the Brummeria case, the Supreme Court of Appeal was not called upon to decide as to whether the right of use of the interest free loans was of a capital nature. The issue was, unfortunately, not properly raised by the taxpayer during the proceedings.

Another key issue that the Supreme Court of Appeal was not called upon to consider was the valuation of an amount that falls to be included in gross income. SARS had applied a weighted average of bank prime overdraft rates. This was not challenged by the taxpayer, although it represents a particularly high rate. In the draft interpretation note, SARS has left the issue open for consideration with reference to the circumstances of each particular case. In a portion of the interpretation note dealing with retirement villages (such as those operated by Brummeria), however, reference is made to use of a weighted average of bank prime overdraft rates.

The interpretation note, if finalised on the basis set out in the draft, will go some way to easing taxpayers’ concerns. It appears that SARS’ intended application of the Brummeria judgement is not as wide as some had feared. It should, however, be borne in mind that the judgement did leave a number of important questions unanswered and that the law is therefore far from final with regard to the consequences of interest free loans.