Taking loans can have certain, direct tax advantages for businesses in South Africa. These depend on how funds are used, rather than on the type of loan.
Business use: when loan interest may be deductible
If a loan is used to buy stock, machinery or equipment, or fund day-to-day operations, the interest portion may be tax deductible as a business expense.
The loan must be clearly traceable and substantiated by invoices, bank statements and records to prove the funds are being used for income-generating purposes.
In the case of an asset-based loan like those we offer at LoanAgainst, the asset used as collateral, be it jewellery, a luxury watch, or vehicle, does not affect deductibility – only the use of the funds does.
What South African law says about deducting interest on business loans
The law is clear in this regard. The Income Tax Act 58 of 1962 states that when a loan is secured to fund a business transaction, the interest can be claimed as a deductible expense.
The type of financial instrument used to raise the funds is immaterial. According to the recently amended Section 24(J) of the Act, the provision applies equally to secured and unsecured loans, cash advances, lines of credit, and any other form of business debt.
What is key is the interest must be incurred in the production of income, and for the purposes of the taxpayer’s trade.
As an example, using borrowed money to pay out a dividend would not qualify as using the funds for the production of business income.
Purchasing or renting a capital asset that contributes to business operations with the proceeds of a loan – real estate, vehicles, an IT system or manufacturing equipment – would.
Caution about mixing business and personal uses
Using the same loan for both business and personal uses is best avoided.
Only the business portion’s interest is deductible, and it takes careful accounting and record-keeping to comply with the administrative requirements of SARS.
Preserving capital structure
A capital preservation strategy is the backbone of any successful business. It is the foundation of solid cash flow – the pre-requisite for business growth and expansion.
Using a loan to improve cash flow while preserving working capital ensures there are always sufficient funds available to weather seasonal fluctuations, cover unexpected expenses and build creditworthiness.
About SARS compliance
For a business to maintain its obligations under South African tax law, it must be tax compliant. That involves paying due taxes on time.
Proper record-keeping of the entity’s financial transactions, and the retention of all supporting documents, is crucial to full compliance.
For most business owners, unravelling South Africa’s complex tax legislation, regulations and administrative requirements is daunting.
A sensible solution is to consult a tax professional who can assist with legal compliance requirements, provide strategic tax planning, and ensure the business gets maximum benefit.
Non-compliance can have severe financial implications, and lead to long-term reputational damage.
Business loans against assets
LoanAgainst provides business loans against vehicles and other movable assets of value.
When used for income-generating purposes, asset-based loans are a form of “smart borrowing” that can offer both cash-flow and tax benefits.
Our flexible collateral model makes it easy to access capital – but it is how the funds are used that determines the tax outcome.
