Page 14 - PowerPoint Presentation

THE FINANCING DECISION

Income Tax Act - Section 24J illustration

• When incorporating the effects of taxation (applicable to a business) into

the financing decision, we have to incorporate the effect of taxation into

the financing related cashflows (when determining the NPC or IRR) and/or
the discount rate (when determining the NPC).

• In terms of current South African tax law, interest is normally deductible by

the debtor (borrower) and represents income in the hands of the creditor

(lender).

• In this regard, section 24J of the Income Tax Act is important, as it is the
main section under which interest will be either deductible or included in

income.

• Section 24J regulates the timing of the accrual and incurral of interest. In

general terms, it spreads the interest (and any premium or discount) over
the period or term of the financial arrangement by compounding the

interest over fixed accrual periods using a predetermined rate referred to

as the ‘yield to maturity’. The section also governs the inclusion of interest
accrued in a taxpayer’s gross income and the deduction of interest incurred

from income.
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