Commissioner for the South African Revenue Service v Scribante Construction (Pty) Ltd

Scribante Construction (Pty) Ltd, a family-owned civil engineering company, declared dividends in 1990 amounting to R6 573 076. Instead of paying the dividends out in cash, the amounts were credited to the shareholders’ loan accounts. Part of the credited amount bore interest at an agreed rate, while the remainder did not. The arrangement was effected purely through accounting entries, with the company retaining the cash in interest-bearing call accounts. The company deducted the interest credited to shareholders’ loan accounts in its 1991–1993 income tax returns as expenditure incurred in the production of income under s 11(a) of the Income Tax Act 58 of 1962. SARS disallowed the deductions, arguing that the interest arose from the dividend declaration and was not income-producing. The taxpayer succeeded in the Special Court and in the Full Court, leading to an appeal to the Supreme Court of Appeal.

The appeal by the Commissioner for the South African Revenue Service was dismissed with costs.

The case clarifies the deductibility of interest paid on shareholders’ loan accounts arising from dividends left in the company. It confirms that where dividends are genuinely declared from available profits and subsequently loaned back on commercial terms, interest paid may be deductible if it is sufficiently connected to income-producing activities. The judgment provides important guidance on the application of ss 11(a) and 23(g) of the Income Tax Act and distinguishes impermissible dividend-financing schemes from bona fide commercial arrangements.