The impact of the deletion of section 11 (bA) on the deductibility of pre-production raising fees incurred raising fees in the expansion of an existing trade

Abstract

Section 11(bA) was recently deleted and replaced by section 11A in the Income Tax Act No. 58 of 1962 (“the Act” – all references to sections and paragraphs hereafter refer to the Act, unless otherwise indicated). Section 11(bA) and section 11A determined the income tax treatment of qualifying pre-production interest incurred. The article focused on whether or not pre-production raising fees incurred by the taxpayer during the expanding of an existing trade will be deductible in terms of section 11(bA) or section 11A. Section 11(bA) and section 24J allow for the deduction, in certain circumstances, of interest or related finance charges. In the recently decided C:SARS v South African Custodial Services (Pty) Ltd 2012 (1) SA 522 (SCA), 74 SATC 61 (“SA Custodial”) it was found by the court that raising fees can be read under the phrase interest or related finance charges in terms of section 11(bA). The question arose whether or not the taxpayers are being disadvantaged by the fiscus through the deletion of section 11(bA) and its replacement by section 11A, especially in regard to pre-production raising fees incurred during the expansion of an existing trade. This article investigates the interaction between sections 11(bA), 11A and 24J of the Act in order to determine the difference in the income tax treatment between these sections for the pre-production raising fees incurred. The result of the investigation into the interaction of these sections will indicate whether or not the taxpayer is being disadvantaged by the fiscus through the deletion of section 11(bA) and its replacement by section 11A.