Johannesburg — TAX analysts have raised concerns in view of a recent Supreme Court of Appeal judgment that all interest-free loans will give rise to an income tax liability in the hands of the borrower, including loans by a founder to a family trust.

In the Brummeria Renaissance judgment delivered last month, a company which developed retirement villages entered into an agreement with the prospective occupant of a unit. In terms of the agreement, the prospective occupant made the developer an interest-free loan and, in return, received a contractual right to live in the unit until he died. The court held the benefit of getting a loan interest-free had to be included in the developer's income for tax purposes.

However, Bob Williams, a tax expert at the University of Kwa- Zulu-Natal, said at the weekend the judgment did not lay down a rule that all interest-free loans would give rise to a tax liability for the lender.

"It follows from the general principles of tax law there will be an income tax liability only if the interest-free loan is a benefit of a revenue nature in the hands of the borrower," Williams said. In other words, if it is received by the borrower in the course of carrying on a business, or scheme, or profit making, he said.

Williams said it was important to recall that where a taxable benefit arose from an interest-free loan, the borrower was taxed on the basis that he was deriving a non-monetary benefit, namely a contractual right to have use of money without paying interest. It is the value of that right that is taxable.

Anton Kriel, a tax director at BDO Spencer Steward Services, said that for now there was no reason to be alarmed by the judgment if a loan was without a quid pro quo. (Without a consideration for the receipt, or use, of the loan free of interest.)

"Our view is based on the conclusion that the facts that resulted in this judgment are very specific; they clearly indicate that a barter transaction was entered into."

Kriel said the judgment was fundamental, especially in relation to all those taxpayers who have the "benefit" of not paying interest on loan accounts.

He said even though the judgment was wide, it should be read and interpreted on the facts of the case.

"A general application of the case would make a mockery of the principle that a person cannot be taxed on notional income. We hope the SA Revenue Service (SARS) will release its official view soon."

In most cases where interest-free loans are received, such as loans to family and trusts, no consideration is provided in return for the use of capital on the loan account, free of interest. "This will, indeed and hopefully, shelter the majority of taxpayers from being taxed on the 'benefit' of not paying interest on a loan."

Kriel said taxpayers in receipt of interest-free loans should not start summarily paying interest on such loans. At least not until SARS publicly announces that its interpretation of this case applies to all interest-free loans.