The tax treatment of a financial instrument purchased by a trust
Interest has always been considered as the charge for money borrowed and akin to rental in its treatment for tax purposes. As a result it has been considered to be a revenue expense which, provided has been actually incurred, in the production of income, for the purpose of the trade, is fully deductible. The main area of concern has been the timing of the incurral or accrual of the interest which has opened a plethora of opportunities for tax practitioners in specialising in mismatching these fundamental aspects creating a time lag between the incurral and the accrual.for the benefit of the taxpayer. As a result of this Section 24J of the Income Tax Act has been introduced with the design to remove this apparent mismatching and confirm the view held in some judgements that interest does accrue de die in diem. In this paper I propose to look at a further aspect which has been highlighted by the introduction of Section 24J, the nature of interest as a revenue expense and the taxability of the interest where S24J applies. This will be done by means of an example, in which a trust ( discretionary or vesting) purchases Eskom Stock, at a discount, for the benefit of the beneficiaries. T,vo fundamental questions arise, can the discount received be classed as .interest in terms of section 24J and if so will it be taxable, and secondly, if the answer to the first is yes, who should be taxed. First it is necessary to look back at the previous treatment of interest and the effect the introduction of S 24J has had on this.
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