SOUTH AFRICAN REVENUE SERVICE
INLAND REVENUE
MEDIA RELEASE NUMBER 1 OF 1996

16 APRIL 1996

INCOME TAX : ACCRUAL AND INCURRAL OF INTEREST ON FINANCIAL INSTRUMENTS

1. In the 1995 Budget the introduction of an accrual basis was announced by the Minister of Finance which would recognise the spreading of interest (including discounts and premiums) on a day-to-day (yield to maturity) basis for tax purposes.
   Legislation was introduced during 1995 in the form of section 24J of the Income Tax Act, 1962, (the Act) to give effect to the announcement and the provisions of that section are applicable to all financial instruments issued after 15 March 1995 as well as financial instruments issued on or before that date and transferred on or after 19 July 1995.
   At the time, it was also announced that legislation will be introduced during 1996 which will have the effect of extending the scope of the accrual basis to all financial instruments, irrespective of the date of issue of the relevant financial instrument.

2. In the 1996 Budget it was, therefore, announced that the Act is to be amended this year to incorporate into the accrual system all financial instruments still in existence on 13 March 1996, which were issued before 16 March 1995, but which are not within the scope of the accrual system.
   Concern has, however, been expressed that the announcement in this year's Budget may create the impression that the proposed amendment will have the effect of altering a taxpayer's vested rights to a deduction for tax purposes which he has enjoyed before the proposed amendment becomes effective with regard to a financial instrument issued before 16 March 1995.
   In order to remove any uncertainty which may exist in this regard, it is necessary to emphasise that it is not the intention to disturb the tax principles in relation to the timing of the deductibility of interest as it applied in respect of interest incurred prior to 16 March 1995, with regard to financial instruments issued prior to that date.
   The proposed amendment will therefore solely encompass the accrual of interest as from 13 March 1996 in relation to financial instruments issued prior to 16 March 1995, which are not within the scope of section 24J of the Act as yet.
   Where any amount of interest which would have accrued to a taxpayer until 13 March 1996 in respect of such an instrument had the provisions of section 24J been applicable, exceeds the interest which has accrued to such taxpayer in relation to such financial instrument in terms of the Act as it applied before the proposed amendment takes effect, such excess will for income tax purposes be accounted for on the date of transfer or maturity (whichever the earlier) of the relevant financial instrument.

Issued by:
The Commissioner for Inland Revenue
P O Box 402
PRETORIA
0001

Contact persons:
Mr J J Louw
Tel: (012) 315-5388
Fax: (012) 325-6006
MR J C De La Rey
Tel: (012) 315-5319