Tax and SARS knowledge base
Can I deduct interest paid to earn foreign interest income?
Can I deduct interest paid to earn foreign interest income?
Last reviewed:
Direct answer
Possibly, but not automatically. The existence of an ITR12 line for allowable interest expenses connected to foreign interest does not mean every interest charge on a loan, overdraft, credit card or investment facility qualifies. You need evidence that the borrowing and expense are sufficiently connected to the foreign interest income, together with a defensible allocation where money was used for more than one purpose. SARS has introduced a foreign-interest expense line to align with Practice Note 31. Treat that as a reporting route, not as a blanket deduction rule. Start with the lending and account records, then seek advice before claiming a material amount.
What this means in practice
The key practical question is not whether a loan exists. It is what the borrowed funds actually funded. A loan used only to place money in an interest-bearing foreign account is different from a facility used partly for household expenses, a property purchase, foreign shares and cash savings. In a mixed-purpose arrangement, claiming all interest against one foreign-interest amount is likely to be difficult to support. Keep the gross foreign interest separate from any foreign withholding tax and separate again from local bank fees or exchange costs. A cost may be commercially real but not automatically deductible for normal-tax purposes. Do not convert every account charge into a tax deduction. Timing also matters. Interest may be charged over a different period from the interest credited by the offshore bank. A good schedule identifies interest received, borrowing interest paid, the relevant dates, currency and the link between the accounts. This is more useful than relying on a year-end balance alone.
Step-by-step
- Trace the loan proceeds.
Save the loan agreement and statements showing where the borrowed funds went. If funds passed through several accounts, retain the transfer trail.
- Identify the income-producing portion.
Separate money used to earn foreign interest from money used for private, capital or other investment purposes. Do not force a simple percentage without records that support it.
- Obtain lending evidence.
Keep lender statements, interest certificates and payment evidence. Confirm whether any charges are interest, fees, penalties or capital repayments.
- Prepare a calculation schedule.
List the foreign interest, the claimed expense, the dates, currency and the reason for the allocation. Make the schedule understandable to someone who did not arrange the loan.
- Check the current ITR12 guidance.
SARS return fields can change. Use the current foreign-interest container and do not place an expense under an unrelated local-income field.
- Retain documents after filing.
Keep loan and investment documents with the filed return and assessment. A later verification request may require more than a bank balance.
Documents and records to keep
- Loan agreements, facility letters and lender statements.
- Bank records tracing borrowed funds to the foreign interest-producing account.
- Foreign bank interest certificates and statements.
- Allocation calculation, currency-conversion support and proof of payment.
- ITR12, ITA34 and SARS correspondence.
Important limits and exceptions
This article does not confirm that a particular expense is deductible. Mixed-purpose borrowing, associated-party loans, foreign-currency funding, refinancing and investment arrangements that include shares or property are high-risk fact patterns. A deduction can be restricted where the causal connection is weak or the amount cannot be substantiated. Do not confuse the deduction question with foreign withholding-tax relief. They are different issues. Do not report a capital repayment as interest, and do not claim a penalty charge merely because it appears on a lender statement.
When to get tailored advice
Get tailored advice before filing where the expense is material, funding was mixed, a facility was refinanced, a foreign entity is involved or the claim affects multiple tax years. TaxProof can help assemble a document trail, while an adviser can assess the legal connection and allocation.