The debate around deducting upfront loan fees in South Africa

In business finance, small details can have big tax consequences. One issue that continues to surface in funding transactions is the tax treatment of upfront loan fees, often referred to as raising fees, arrangement fees or origination fees.

These fees are typically once-off amounts paid to a lender or arranger to secure a loan. They are not interest in the traditional sense, but rather the cost of accessing funding.

The question seems simple:

Can these fees be deducted for income tax purposes?

Until recently, SARS’ answer has been a firm no. But a Tax Court judgment in early 2025 has reopened the debate and SARS’ response has left taxpayers navigating an uncertain and contested landscape.

The legislative framework

The starting point is section 24J of the Income Tax Act, which governs the tax treatment of interest and “similar finance charges” incurred in respect of qualifying debt instruments or financial arrangements.

Section 24J is intended to reflect the true economic cost of borrowing, typically by spreading that cost over the life of the loan using a yield-to-maturity approach.

If section 24J does not apply, the deductibility of upfront fees must be considered under the general deduction formula in section 11(a). This raises familiar questions:

• Was the expenditure incurred in the production of income?
• Was it incurred in the course of trade?
• Is it capital or revenue in nature?

Historically, SARS has argued that upfront loan fees fall outside section 24J because:

• Interest accrues over time, whereas
• Raising fees are once-off amounts paid to arrange the loan.

The Tax Court weighs in

In Taxpayer Trust v CSARS (Tax Court, 13 January 2025, IT 76795), the Tax Court took a different, more commercially grounded view.

The court found that:

• The raising fees were a condition of obtaining the loan – without payment, the funding would not have been advanced.
• Although the fees were not calculated over time like interest, they formed part of the overall cost of borrowing.
• The word “similar” does not mean “identical”, a finance charge does not need to mirror interest perfectly to fall within section 24J.

Importantly, the court aligned its reasoning with earlier authority allowing deductions for financing-related costs with a close connection to the loan itself, including:

• Advisory, legal and commitment fees (as confirmed by the SCA in CSARS v South African Custodial Services (Pty) Ltd), and
• Upfront debt origination fees (Taxpayer A v CSARS, Tax Court, 14 July 2022).

On this basis, the court concluded that raising fees can qualify as “similar finance charges” under section 24J.

SARS responds: Interpretation Note 142

Following the judgment, SARS released Interpretation Note 142 in December 2025 (after a lengthy consultation process).

In the final Interpretation Note, SARS adopts a deliberately narrow interpretation:

• Raising fees are generally regarded as capital in nature, rather than revenue.
• To be “similar” to interest, a finance charge must compensate the lender for the time-based use of money.
• On this basis, upfront raising or arrangement fees do not fall within section 24J.

While SARS concedes that such fees may be deductible under another provision (such as section 11(a)) if sufficiently linked to income-earning activities, its position under section 24J remains restrictive.

SARS has also expressly criticised the Tax Court judgment and confirmed that it has appealed the decision. That appeal is still pending.

The broader interpretation and why it matters 

During the public comment process on the draft Interpretation Note, many commentators argued that SARS’ approach fails to reflect how section 24J is designed to operate in practice.

The central point is this:

Section 24J is concerned with the overall cost of borrowing, not individual finance charges viewed in isolation.

Once a qualifying debt instrument exists, section 24J applies a yield-to-maturity methodology that takes into account all amounts payable under the instrument over its term.

From this perspective:

• Upfront raising, origination or structuring fees payable under the loan agreement form part of the total borrowing cost.
• These fees should therefore be spread and deducted over the life of the loan, rather than treated as standalone capital expenditure.

This broader interpretation has also found support in earlier Tax Court authority, including Taxpayer A v CSARS, where upfront fees were treated as part of the overall financing cost.

Notwithstanding these submissions, SARS ultimately retained its narrower view in the final Interpretation Note.

Where does this leave taxpayers?

For now, the position remains unsettled:

• Tax Court decisions are persuasive, but not binding on all taxpayers.
• SARS Interpretation Notes are not law, but they reflect SARS’ administrative stance.
• SARS’ official guidance therefore remains conservative.
• Claiming a section 24J deduction for upfront loan fees may attract increased scrutiny.

That said, the potential tax impact particularly for property, infrastructure and large-scale project financing, can be significant.

Practical takeaways

If your business has incurred upfront loan fees:

• Ensure that loan agreements clearly link the fee to accessing the funding.
• Maintain robust supporting documentation.
• Carefully assess the risk profile before claiming a section 24J deduction.
• Even where section 24J does not apply, consider whether a deduction may still be available under section 11(a), depending on the facts.

Final thoughts

This is an area where commercial reality and tax interpretation continue to collide. Until a higher court provides clarity, careful structuring and informed judgment are essential.

At Regan van Rooy, we are monitoring the appeal closely and assisting clients in navigating the uncertainty with pragmatic, defensible tax advice.

If upfront loan fees form part of your funding structure, now is the time to revisit how they are being treated. Get in touch with us to discuss.