The introduction of section 11G marks a deliberate shift in the taxation of passive interest structures. It follows the withdrawal of Practice Note 31, titled “Interest paid on moneys borrowed”, but does not simply replicate that regime. Instead, section 11G introduces a narrower and more structured statutory framework for the deduction of expenditure incurred in producing interest income.
Under the general principles of the Income Tax Act 58 of 1962 (“ITA”), interest expenditure is deductible in terms of section 11(a) or section 24J only where it is incurred in the production of income from the carrying on of a trade. Practice Note 31 created a concession to this position. It allowed taxpayers who earned interest outside of a trade context to deduct expenditure incurred in producing that interest income, subject to the limitation that such deductions could not exceed the interest income earned.
Importantly, Practice Note 31 extended beyond interest expenditure itself and permitted the deduction of a broader category of expenses, such as administrative and management costs, provided they were incurred in the production of interest income. This approach reflected a long- standing SARS practice rather than a principle grounded in the statutory framework.
The codification of this practice in terms of the new section 11G has significantly restricted the deductions that can be claimed against interest income generated that was not in the course of carrying on a trade. Taxpayers can no longer deduct non-interest expenses such as admin costs, trustee fees, accounting fees, management fees and bank charges. This exclusion is reinforced by the continued application of section 23(g) of the Income Tax Act, which denies deductions for expenses not incurred in the production of income from a trade. Given that section 11G specifically targets non-trade scenarios, reliance on section 11(a) of the Income Tax Act will, in most instances, be unavailable.
Furthermore, section 11G introduces an explicit quantitative limitation. The interest expense is limited to the interest income, effectively ring-fencing the interest expense as the provisions curtail the creation of assessed losses through the deduction of the interest expense.
It is also important to understand the interaction between section 11G and section 23(b) of the ITA. Section 23(b) generally prohibits the deduction of interest incurred in respect of income that is not derived from carrying on a trade. Section 11G operates as a specific exception to this prohibition by allowing a limited deduction of interest in a non-trade context. However, this override is confined to qualifying “interest” as defined, and does not extend to other forms of expenditure.
As for the scope, the provisions of section 11G apply to years of assessment commencing on or after 1 January 2025, with a slight refinement in 2026, specifically the inclusion of the phrase “notwithstanding section 23(b)”, which did not alter the core of the section’s provisions. The provisions also apply to any “person”, including individuals, trusts and companies, but only in a non- trade context.
Section 11G represents a fundamental shift from a flexible, practice-based approach to a strict statutory regime. The practical effect is a more constrained deduction framework, particularly for taxpayers who previously relied on Practice Note 31 to deduct broader categories of expenses.
Intellectual property disclaimer: The contents of any article published by Pieterse Sellner Erasmus should not be construed as professional legal advice.
Intellectual property disclaimer:
The contents of any article published by TRM Tax Attorneys should not be construed as professional legal advice.
