Page 12 - 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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