Withdrawal of Proposed Alignment to Interest Deduction Limitation Rules

By Bruce Russel

Overview of Interest Deduction Limitation Rules

Sections 23N and 23M of the Income Tax Act establish rules that restrict the deduction of interest under specific circumstances. Section 23N is applicable to interest qualifying for deduction in connection with an “acquisition transaction” as defined in section 24O, as well as interest arising from debts related to a “reorganisation transaction”. Section 23M focuses on interest where the recipient is not taxed in South Africa and is subject to an interest withholding tax rate of less than 15%.

Comparison of the Limitation Formulae

Although both sections intend to limit deductible interest, each uses a distinct formula. Section 23N employs a base limit of 40 percent, which is adjusted in accordance with changes in the repo rate. In contrast, section 23M implements a fixed limit of 30 percent. 

Recent Legislative Changes

The 2024 Taxation Laws Amendment Act introduced an alignment of the formulae used in sections 23N and 23M, effective for years of assessment beginning on or after 1 January 1 2027. This change standardised the limitation calculation, so that both sections would apply a flat 30 percent when determining the restricted deduction amount.

Proposal for Withdrawal of Alignment

Concerns have been raised regarding the necessity of aligning these formulae, given the unique nature of the rules and the types of transactions governed by each section. In response, Annexure C to the 2026 Budget Review proposes that this alignment be withdrawn, thereby maintaining the distinct approaches originally set forth in sections 23N and 23M.