The South African Reserve Bank on 14 April 2020 announced a reduction in the “repo rate” (the benchmark interest rate at which the Reserve Bank lends money to other banks) by 100 basis points (i.e., 1%) effective 15 April 2020.
This is the second interest rate reduction (the first in mid-March) in response to the coronavirus (COVID-19) pandemic.
Implications for taxpayers
Provisions contained in the Income Tax Act 58 of 1962 rely on or make reference to the repo rate in the determination of the taxable income of a taxpayer.
Due to the fact that the repo rate is one of the key variables in determining the interest limitation, taxpayers need to consider that forecasted calculations are performed to determine the effect thereof on taxable income and consequently the estimated taxable income, especially due to the potential implications that this may have on provisional tax calculations, and therefore cash flow. Any underestimation of provisional tax could result in potential penalties and interest.
Read an April 2020 report [PDF 132 KB] prepared by the KPMG member firm in South Africa
Implications of repo rate on deemed loans
With regard to certain “loans,” a reduction in the repo rate reduces the interest that may be deemed to be “foregone” in some loan situations and thus can affect the amount subject to the tax on “donations” in respect of any deemed loans. The interest foregone is calculated as the difference between the official rate of interest (now reduced to 5.25%) and the interest (if any) charged on the affected loans. Read an April 2020 report [PDF 357 KB] prepared by the KPMG member firm in South Africa
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