A recent Supreme Court of Appeal (SCA) judgment has provided important clarity for businesses on the tax treatment of fees incurred when raising finance, confirming that certain raising fees may be treated as similar to interest and therefore qualify for a tax deduction even if they are capital in nature. The judgment, which went against SARS, could have significant implications for taxpayers who incur upfront financing costs when borrowing to acquire capital assets.
For many years, all finance charges “related” to interest could be deducted for tax purposes on the same basis as interest. This is significant because interest incurred in the production of income may be tax deductible even if the expense is capital in nature. The legislation was amended, narrowing the definition so that only finance charges “similar” to interest are treated as interest for tax purposes.
It was generally accepted that raising fees were “related” to interest, but the question arose whether they are also “similar” to interest. For taxpayers incurring raising fees on funds borrowed to acquire capital assets used in their businesses, the legislative change raised the question of whether raising fees could remain tax deductible if they are capital in nature.
In C:SARS v Cornucopia Trust (469/2025) [2026] ZASCA 116, the taxpayer claimed deductions for raising fees incurred in financing and refinancing the acquisition of two commercial properties. SARS disallowed the deductions, arguing that the raising fees were not finance charges “similar” to interest, but the Tax Court found in favour of the taxpayer and the SCA majority confirmed that finding.
The SCA considered the nature of the raising fees paid by the taxpayer. The raising fee was a precondition for credit and was calculated with reference to the amount of credit to be obtained and the lender’s level of risk. In this context, the fee, together with interest, constituted the consideration the borrower paid to obtain credit. The raising fees were directly proportional to the loan capital, linked to the period of the facility (although payable upfront and non-refundable), and compensated the lender for the risk and cost of being deprived of its money. In these circumstances, the raising fees were not merely consideration for the administrative effort of arranging the loan; they were an indivisible part of the cost of obtaining credit and shared the same functional characteristics as interest.
The majority summarised the legal position as follows:
- Raising fees that are inextricably linked to the procurement of the loan have the same functional characteristics as interest (i.e. to compensate the lender for providing credit); and
- They are distinguishable from ancillary charges, such as legal fees, financial advisory fees, and other fees, which are not strictly speaking necessary but incidental to the loan and are compensation for the labour associated with producing the services charged for.
The takeaway from the majority’s reasoning is that (raising) fees that are strictly linked to the procurement of the loan, both in amount and objective, and that compensate the lender for the risk and cost of being deprived of its money, fall within the ambit of section 24J. By contrast, fees charged for the efforts associated with obtaining the loan – such as legal fees and financial advisory fees – remain outside.
Contrary to the view expressed by SARS in Interpretation Note 142, issued on 12 December 2025, the SCA’s majority decision, being the first SCA authority on the meaning of “similar finance charges” following the 2016 legislative amendment, endorsed a functional, business-like approach, rather than a formalistic approach, in determining whether finance charges, other than interest, are sufficiently similar to interest to be tax deductible if they are incurred in the production of interest, even if they may be capital in nature.
Important characteristics to achieve the required level of similarity include a calculation of the raising fees as a percentage of the loan capital, and with regard to the risk undertaken by the lender, which is impacted by the term of the loan.
Characteristics which are not determinative are whether raising fees are paid once-off as a lump sum, and whether they are paid to the lender directly or to another entity as part of the arrangement with the lender.
For the full analysis of the judgment and its implications for taxpayers, read the original article here.
Written by Doelie Lessing, a Director, and Luke Magerman, a Senior Associate at Werksmans Attorneys