The Income Tax Act contains definitions for various interest rates. These interest rates serve as the basis for interest calculations in income tax in different circumstances and can broadly be categorised into three main areas. Knowing the difference between these different types of interest rates could have a material impact on the amount of interest due or receivable by taxpayers or influence the way in which they structure transactions.
What are the different types of interest rates and when are they applicable? SARS currently distinguishes between two “prescribed rates” and a so-called “official rate of interest”. The prescribed rates are administrative in nature and applicable to tax debts, whereas the official rate of interest is more substantive in nature, setting the baseline against which the reasonability of interest rates to transactions are measured.
Importantly, the prescribed rate is currently still regulated by the Act. It has long been proposed that it be regulated in terms of the Tax Administration Act. The relevant provisions are already contained in the Tax Administration Act, but the effective date has yet to be determined. It does not, however, appear as though this will, from a value perspective at least, have any material impact.
“Interest rate” in income tax can take on more than one meaning, depending on the specific circumstances. It is therefore critical that taxpayers are aware firstly, what piece of legislation is applicable at any point in time and secondly, what type of interest rate is applicable in their specific circumstance.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE).