We wish to bring the following recent legislative change to your attention as it may affect the deductibility of expenses in your trust or company’s investment portfolio/ asset holding.

The Income Tax Act generally allows a deduction for interest expenditure only where it is incurred in the production of income while carrying on a trade, in terms of section 11(a) or section 24J. Practice Note 31 of 1994 (PN31) provided a concession to this rule. It allowed taxpayers who were not carrying on a trade to deduct expenses incurred in the production of interest income, subject to limits. SARS has now formally withdrawn PN31 noting that section 11G will apply to years of assessment commencing on or after 1 January 2026.

Section 11G was introduced to govern the deductibility of expenses incurred in the production of interest income where a taxpayer is not carrying on a trade. In simple terms, it allows taxpayers to deduct qualifying interest expenditure directly incurred in earning interest income, subject to certain limitations (deductions are capped at the amount of related interest income). It applies to all taxpayers, including individuals, trusts, and companies.

The most important change is that section 11G allows a deduction only for interest as defined in s24J, whereas PN31 allowed the deduction of all expenditure incurred in the production of interest income. This means that costs such as administration fees, arrangement fees, bank charges, other financing charges, accounting fees and trustee fees that are not regarded as interest will no longer be deductible where the taxpayer is not carrying on a trade.

The practical effect is therefore a narrower deduction than was available under PN31.

Although non-qualifying expenses (such as administration fees and bank charges) are not deductible against interest income under section 11G, they will still need to be allocated across the various income streams reflected in the financial statements. The portion allocated to interest income will be added back as a non-deductible expense in the tax computation.

Our Sentinel team is well positioned to assist you in navigating these changes and to advise on the impact for your specific circumstances. Please do not hesitate to contact us on contact@sentinelinternational.co.za should you require further guidance or wish to discuss any planning considerations.