Nwanda Internal News (July 2017)
31 July
Provisional tax when you sell your property
4 October

The “in duplum” rule and tax legislation

The “in duplum” rule originated from the South African common law and has been applied through South African case law for over 100 years. This common law rule specifies that interest on a debt will cease to run (or accrue) when the total amount of arrear interest equals the amount of the principal debt outstanding.

A statutory “in duplum” rule was later introduced into South African law in the National Credit Act[1]  which came into effect on 1 June 2007. This rule however does not only apply to unpaid interest but also limits, together with the unpaid interest, other finance related charges (eg. initiation fees, service fees, credit insurance, default administration fees and collection costs).

The granting of zero or low interest loans between related parties may result in a loss to the fiscus in certain instances. For example, less employees’ tax (“PAYE”) collection where an employer who grants a zero or low interest loan to an employee, the avoidance of donations tax where a person transfers assets to a trust in exchange for a zero or low interest loan or the possible avoidance of dividends tax where a company grants a shareholder a zero or low interest loan. The Income Tax Act[2] contains various specific anti-avoidance rules which seek to counter these possible tax benefits by taxing the difference between the amount of interest actually incurred and the amount of interest that would have been incurred at the official rate. These provisions in the Income Tax Act, using the “official rate of interest” to quantify the possible tax benefits, include section 7C (possible donation arising when a zero or low interest loan is advanced to a trust by a connected person), section 64E(4) (deemed dividends in respect of a zero or low interest loan made by a company to a shareholder) and the Seventh Schedule (fringe benefits in respect of a zero or low interest loan between an employer and employee).

SARS is of the view that some taxpayers are relying on the “in duplum” rule to circumvent the abovementioned anti-avoidance rules. In this regard, it is proposed in the recently published draft Taxation Laws Amendment Bill to introduce a new section 7D to the Income Tax Act. The proposed provision states that the anti-avoidance rules dealing with zero or low interest loans should apply in spite of the application of either the statutory “in duplum” rule or the common law “in duplum” rule.[3]

The proposed amendment will come into effect on 1 January 2018 and if enacted will apply in respect of interest incurred or deemed to have been incurred on or after that date.

[1] No. 34 of 2005

[2] No. 58 of 1962

[3] Clause 5 of the Draft Taxation Laws Amendment Bill

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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