South Africa: Draft legislation addressing scope of section 23M
Proposed change excludes foreign exchange differences from the definition of "interest"
The 2025 Draft Taxation Laws Amendment Bill (DTLAB) introduces refinements to section 23M of the Income Tax Act, effective for years of assessment starting on or after January 1, 2026. The amendments aim to clarify the scope and reduce complexity.
Section 23M limits interest deductions when there is a controlling relationship between debtor and creditor, and the interest income is not taxable for the recipient. Currently, section 23M broadly defines "interest" to include foreign exchange differences, leading to complexity as the rules apply to all foreign-denominated amounts owed, regardless of whether they bear interest.
The DTLAB proposes that taxpayers use the definition of "interest" in section 24J when calculating "adjusted taxable income" and applying the limitation test under section 23M(3). This change would exclude foreign exchange differences from the definition of "interest" in section 23M, addressing the issue when foreign exchange differences alone triggered the interest limitation rules.
Read an August 2025 report prepared by the KPMG member firm in South Africa