Category: PART I – Normal Tax (ITA)

Subsection 2, 3, 4, 5, 6 of section 23O of ITA

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(2)     Where during any year of assessment any amount is received by or accrues to a small, medium or micro­ sized enterprise from a small business funding entity for the acquisition, creation or improvement, or as a reimbursement for expenditure incurred in respect of the acquisition, creation or improvement of trading stock, any expenditure incurred in respect of that trading stock allowed as a deduction in terms of section 11(a) or any amount taken into account in respect of the value of trading stock as contemplated in section 22(1) or (2) must be reduced to the extent that the amount is received or accrued from the small business funding entity for that purpose.

[Sub­section (2) substituted by section 29(a) of Act 34 of 2019]

(3)     Where during any year of assessment any amount is received by or accrues to a small, medium or micro­ sized enterprise from a small business funding entity for the acquisition, creation or improvement, or as a reimbursement for expenditure incurred in respect of the acquisition, creation or improvement of an allowance asset, the base cost of that allowance asset must be reduced to the extent that the amount is received or accrued from the small business funding entity for that purpose.

[Sub­section (3) substituted by section 29(a) of Act 34 of 2019]

(4)     Where during any year of assessment any amount is received by or accrues to a small, medium or micro-sized enterprise from a small business funding entity for the acquisition, creation or improvement of an allowance asset or as a reimbursement for expenditure incurred in respect of that acquisition, creation or improvement, the aggregate amount of the deductions or allowances allowable to that person in respect of that allowance asset may not exceed an amount equal to the aggregate of the expenditure incurred in the acquisition, creation or improvement of that allowance asset, reduced by an amount equal to the sum of-

(a)     the amount is received or accrued for that purpose; and

[Paragraph (a) substituted by section 41 of Act 17 of 2017 and by section 29(b) of Act 34 of 2019]

(b)     the aggregate amount of all deductions and allowances previously allowed to that person in respect of that allowance asset.

(5)     Where during any year of assessment any amount is received by or accrues to a small, medium or micro-sized enterprise from a small business funding entity-

(a)     for the purpose of the acquisition, creation or improvement of an asset other than an asset contemplated in subsection (2) or (3); or

(b)     as a reimbursement for expenditure incurred for the acquisition,  creation or improvement of an asset other than an asset contemplated in subsection (2) or (3),

the base cost of that asset must be reduced to the extent that the amount is received by or accrued from the small business funding entity for that acquisition, creation or improvement.

[Sub­section (5) amended by section 29(c) of Act 34 of 2019]

(6)

(a)     Where during any year of assessment-

(i)      any amount is received by or accrues to a small, medium or micro-sized enterprise from a small business funding entity; and

(ii)     subsection (2), (3), (4) or (5) does not apply to that amount,

[Subparagraph (ii) substituted by section 43 of Act 15 of 2016 effective on 1 March 2015, applies in respect of amounts received or accrued on or after that date]

any amount allowed to be deducted from the income of that small, medium or micro-sized enterprise in terms of section 11 for that year of assessment must be reduced to the extent of the amount received or accrued from a small business funding entity.

(b)     To the extent that the amount received or accrued from a small business funding entity exceeds the amount allowed to be deducted as contemplated in paragraph (a), that excess is deemed to be an amount received or accrued from a small business funding entity during the following year of assessment for the purposes of paragraph (a).

[Section 23O inserted by section 39 of Act 43 of 2014 effective on 1 March 2015]

“Allowance asset” definition of section 23O of ITA

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‘allowance asset’ means an asset as defined in paragraph 1 of the Eighth Schedule, other than trading stock, in respect of which a deduction or allowance is allowable in terms of this Act for purposes other than the determination of any capital gain or capital loss;

[Definition of “allowance asset” amended by section 43 of Act 15 of 2016 effective on 19 January 2017]

Section 23O (ITA) – Limitations of deductions by small, medium or micro-sized enterprises in respect of amounts received or accrued from small business funding entities

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23O.  Limitation of deductions by small, medium or micro-sized enterprises in respect of amounts received or accrued from small business funding entities

 

(1)       For the purposes of this section-

Subsections 2, 3, 4, 5 and 6 of section 23M of ITA

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(2)     Where an amount of interest is incurred by a debtor during a year of assessment in respect of a debt owed to-

(a)     a creditor that is in a controlling relationship with that debtor;

[Paragraph (a) amended by section 19(1)(i) of Act 20 of 2021 effective on 31 March, 2023 and applicable in respect of years of assessment ending on or after that date (effective date in section 19(2) of Act 20 of 2021 as substituted by section 10 of Act 19 of 2022)]

(b)     a creditor that is not in a controlling relationship with that debtor, if that creditor obtained the funding for the debt advanced to the debtor from a person that is in a controlling relationship with that debtor;

[Paragraph (b) amended by section 19(1)(i) of Act 20 of 2021 effective on 31 March, 2023 and applicable in respect of years of assessment ending on or after that date (effective date in section 19(2) of Act 20 of 2021 as substituted by section 10 of Act 19 of 2022)]

(c)     a creditor that is not in a controlling relationship with that debtor, if that creditor forms part of the same group of companies as that debtor if the expression “at least 70 per cent of the equity shares in” in paragraphs (a) and (b) of the definition of “group of companies” in section 1 were replaced by the expression “more than 50 per cent of the equity shares or voting rights in”; or

[Paragraph (c) added by section 19(1)(i) of Act 20 of 2021 effective on 31 March, 2023 and applicable in respect of years of assessment ending on or after that date (effective date in section 19(2) of Act 20 of 2021 as substituted by section 10 of Act 19 of 2022)]

(d)     a creditor that is in a controlling relationship with that debtor, if that creditor, directly or indirectly through another creditor that is in a controlling relationship with that creditor, obtained the funding for the debt advanced to the debtor from a person that is in a controlling relationship with that creditor or that other creditor,

[Paragraph (d) added by section 19(1)(i) of Act 20 of 2021 effective on 31 March, 2023 and applicable in respect of years of assessment ending on or after that date (effective date in section 19(2) of Act 20 of 2021 as substituted by section 10 of Act 19 of 2022)]

and the amount of interest so incurred or related interest is not during that year of assessment-

(i)

(aa)   subject to tax in the hands of the person, creditor or other creditor referred to in paragraphs (a), (b), (c) or (d), to which the interest or related interest accrues; or

[Subparagraph (aa) substituted by section 19(1)(k) of Act 20 of 2021 and by section 26(1)(g) of Act 17 of 2023 with effect from 1 January, 2024 and applicable in respect of years of assessment commencing on or after that date]

(bb)   included in the net income of a controlled foreign company as contemplated in section 9D in the foreign tax year of the controlled foreign company commencing or ending within that year of assessment; and

(ii)     disallowed under section 23N,

[Subparagraph (ii) substituted by section 39 of Act 17 of 2017 effective on 18 December 2017]

Provided that where any amount of interest incurred or related interest is not included in the income of the person referred to in paragraph (i)(aa), and withholding tax on interest was or will be levied on that amount of interest, on payment thereof, under the provisions of Part IVB of this Chapter, the amount of interest to be regarded as not subject to tax as contemplated in paragraph (i)(aa) will be determined in accordance with the formula:

A = B x (C – D)

                C

in which formula-

(i)      “A” represents the amount to be determined;

(ii)     “B” represents the aggregate of any amount of interest incurred or paid in respect to which the provisions of Part IVB of this Chapter are or will be applicable;

(iii)    “C” represents the number 15; and

(iv)    “D” represents the rate at which withholding tax on interest has been or will be levied on such amount of interest under the provisions of Part IVB of this Chapter, multiplied by the number 100.

[Subsection (2) substituted by section 37(1)(e) of Act 43 of 2014 and amended by section 19(1)(j) and (l) of Act 20 of 2021 and by section 26(1)(h) of Act 17 of 2023 with effect from 1 January, 2024 and applicable in respect of years of assessment commencing on or after that date]

(3)     The amount of interest allowed to be deducted in respect of all debts owed as contemplated in subsection (2), in respect of any year of assessment must not exceed the sum of—

(a)     the amount of interest received by or accrued to the debtor; and

(b)     an amount determined by multiplying the adjusted taxable income of that debtor for that year of assessment by 0,3,

reduced by so much of any amount of interest incurred by the debtor in respect of debts other than debts contemplated in subsection (2) as exceeds any amount not allowed to be deducted in terms of section 23N.

[Subsection (3) amended by section 37(1)(f) of Act 43 of 2014 and by section 28 of Act 34 of 2019 and substituted by section 19(1)(m) of Act 20 of 2021 effective on 31 March, 2023 and applicable in respect of years of assessment ending on or after that date (effective date in section 19(2) of Act 20 of 2021 as substituted by section 10 of Act 19 of 2022)]

(4)     So much of any amount of interest as exceeds the amount determined in terms of subsection (3) may be carried forward to the immediately succeeding year of assessment and, subject to subsection (2), must be deemed to be an amount of interest incurred in that succeeding year of assessment.

(5)     Where an amount of interest is to be taken into account in terms of this section and in terms of section 23N, that amount of interest shall only be taken into account in terms of this section after section 23N has been applied.

[Subsection (5) substituted by section 37 of Act 43 of 2014 effective on 1 January 2015]

(6)     This section does not apply-

(a)     to so much of the interest as is incurred by a debtor in respect of a debt owed to a creditor as contemplated in subsection (2) where-

(i)      that creditor funded that debt amount advanced to that debtor with funding granted by a lending institution that is not in a controlling relationship with that debtor; and

(ii)     that interest is determined with reference to a rate of interest that does not exceed the official rate of interest plus 100 basis points.

[Subparagraph (ii) substituted by section 39 of Act 17 of 2017 and section 41 of Act 23 of 2018 effective on 17 January 2019]

(b)     to any interest incurred by a debtor in respect of any linked unit that is held by a creditor as contemplated in subsection (2) where that creditor is a long-term insurer as defined in the Long-term Insurance Act, a pension fund or a provident fund, if-

(i)      the long-term insurer, pension fund or provident fund holds at least 20 per cent of the linked units in that debtor;

(ii)     the long-term insurer, pension fund or provident fund acquired those linked units before 1 January 2013; and

(iii)    at the end of the previous year of assessment 80 per cent or more of the value of the assets of that debtor, reflected in the annual financial statements prepared in accordance with the Companies Act for the previous year of assessment, is directly or indirectly attributable to immovable property.

[Section 23 inserted by section 61 of Act 31 of 2013 effective on 1 January 2015]

(6A)  This section does not apply to interest incurred on a loan utilised for mining purposes during any period prior to the commencement of production or during any period of non-production, as contemplated in paragraph (b) of the definition of “capital expenditure” in section 36(11).

[Subsection (6A) inserted by section 12(1) of Act 20 of 2022 effective on 31 March, 2023 and applicable in respect of years of assessment ending on or after that date]

(7)     For purposes of this section any exchange difference-

(a)     deducted from the income of a person as contemplated in section 24I(3) or (10A) is deemed to have been incurred by the person; or

(b)     included in the income of a person as contemplated in section 24I(3) or (10A) is deemed to have accrued to that person.

[Section 23M inserted by section 61(1) of Act 31 of 2013 and amended by section 41 of Act 15 of 2016. Subsection (7) added by section 19(1)(n) of Act 20 of 2021 and substituted by section 26(1)(i) of Act 17 of 2023 with effect from 1 January, 2024 and applicable in respect of years of assessment commencing on or after that date]

“Repo rate” definition of section 23M of ITA

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“repo rate”    . . . . . .

[Definition of “repo rate” deleted by section 19(1)(h) of Act 20 of 2021 effective on 31 March, 2023 and applicable in respect of years of assessment ending on or after that date (effective date in section 19(2) of Act 20 of 2021 as substituted by section 10 of Act 19 of 2022)]

“Lending institution” definition of section 23M of ITA

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“lending institution” means-


(a)     a bank; or


(b)     a foreign bank that is comparable to a bank,


contemplated in the Banks Act;

[Definition of “lending institution” substituted by section 26(1)(f) of Act 17 of 2023 with effect from 1 January, 2024 and applicable in respect of years of assessment commencing on or after that date]

“Interest” definition of section 23M of ITA

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“interest” means interest as defined in section 24J, and includes—

(a)     amounts incurred or accrued under any “interest rate agreement” as defined in section 24K(1);

(b)     any finance cost element recognised for purposes of IFRS in respect of any lease arrangement that constitutes a finance lease as defined in IFRS16;

(c)     amounts taken into account in determining taxable income in terms of section 24I(3) and (10A); and

(d)     any amount deemed to be interest under section 24JA,

but excludes any amount that is deemed to be a dividend in specie as contemplated in sections 8F and 8FA;

[Definition of “interest” substituted by section 19(1)(f) of Act 20 of 2021 effective on 31 March, 2023 and applicable in respect of years of assessment ending on or after that date (effective date in section 19(2) of Act 20 of 2021 as substituted by section 10 of Act 19 of 2022)]

“Debtor” definition of section 23M of ITA

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“debtor” means a person that incurs an amount of interest and-

(a)     is a resident; or

(b)     in the case of a person that is not a resident, owes a debt that is effectively connected with a permanent establishment of that person in the Republic;

[Definition of “debtor” substituted by section 37(1)(d) of Act 43 of 2014 and by section 19(1)(e) of Act 20 of 2021 effective on 31 March, 2023 and applicable in respect of years of assessment ending on or after that date (effective date in section 19(2) of Act 20 of 2021 as substituted by section 10 of Act 19 of 2022)]

“Controlling relationship” definition of section 23M of ITA

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“controlling relationship” means a relationship where a person, whether alone or together with any one or more persons that are connected persons in relation to that person directly or indirectly hold at least 50 per cent of the equity shares or can exercise at least 50 per cent of the voting rights or participation rights, in a company;

[Definition of “controlling relationship” substituted by section 37(1)(c) of Act 43 of 2014, by section 19(1)(c) of Act 20 of 2021 and by section 26(1)(d) of Act 17 of 2023 with effect from 1 January, 2024 and applicable in respect of years of assessment commencing on or after that date]