Taxation on interest-free loans

The recent tax judgment in the Supreme Court of Appeal (SARS v Brummeria Renaissance (Pty) Ltd (2007) SCA 99 (RSA)), has created uncertainty regarding the tax implications of interest-free loans.

Facts

Three property developers appealed the revised assessment SARS issued against them in circumstances where their businesses received loans from purchasers which were used to build the client's unit that they secured by debenture. These loans were interest free and remained in force until the client died or withdrew and entitled the client to a usufruct (life usage) over the unit. In this way the developers were not required to raise bank finance (for which they would have paid interest). 

SARS then assessed them on the value of the loans x the average prime rate over the year. 

The developer disputed the assessment and won but SARS took it on appeal. The Supreme Court of Appeal held that the value of the interest free loans were taxable. 

This has thrown the cat amongst the pigeons. In terms of this judgment are all interest free loans now taxable in the hands of the taxpayer who received the benefit? Leading law firm Webber Wentzel Bowens believes that the judgment related to a barter situation and would not apply to all interest free loans. This is their opinion: 

Barter factor narrows interest-free loan ruling
(15 October 2007) 

The recent tax judgment in the Supreme Court of Appeal (SARS v Brummeria Renaissance (Pty) Ltd (2007) SCA 99 (RSA)), has created uncertainty regarding the tax implications of interest-free loans.  

In short: is it possible to deem an accrual in the hands of a taxpayer who received the ‘benefit’ of an interest-free loan? At least for now, there is no reason to be alarmed if an interest-free loan is without a quid pro quo (without a consideration for the receipt, or use, of the loan free of interest), according to a Business Times column, which says this view is based on the conclusion that the facts that resulted in this judgment are very specific – they clearly indicate that a barter transaction was entered into. In this case, the court came to the conclusion that a deemed accrual had taken place because of the fact that the taxpayer had had the benefit of not paying any interest on amounts it received as an interest-free loan. This judgment is fundamental, especially in relation to all those taxpayers who have the ‘benefit’ of not paying interest on loan accounts. Does this principle apply to all persons to whom interest-free loans are made? The facts of the case are also specific: The recipient of the interest-free loan in this case provided a quid pro quo to the persons who advanced the loan to him (the recipient of the interest-free loan provided, to the persons who advanced the loans to him, a consideration in the form of the ‘free’ use of residential units). In essence the transaction was a barter transaction. It is submitted that this fact will distinguish this case from most other interest-free loans.