n South African Law Journal - Does Brummeria sweep clean? A US tax-law perspective
|Article Title||Does Brummeria sweep clean? A US tax-law perspective|
|© Publisher:||Juta Law Publishing|
|Journal||South African Law Journal|
|Author||Stephen Bruce Cohen|
|Publication Date||Jan 2009|
|Pages||489 - 504|
The Supreme Court of Appeal judgment in Commissioner for the South African Revenue Service v Brummeria Renaissance Ltd holds that an interest-free loan produces taxable income for the borrower equal to the interest that would have been charged at market rates. The decision has been wrongly criticized as an 'economic disaster' imposing 'double taxation.' To ignore the economic benefit to a borrower of an interest-free loan is to undermine the fundamental object of the income tax, which is to apportion taxes according to economic well-being. The Brummeria judgment, nevertheless, fails to consider other critical aspects of the interest-free loan transaction. The proper tax treatment of such loans implicates multiple taxpayers and requires an appropriate balance between preventing tax avoidance, on the one hand, and keeping the income tax law from becoming overly complex, on the other. This article compares Brummeria with US tax law, which recharacterizes an interest-free loan as a loan bearing interest at the market rate, coupled with a non-loan payment from the lender to the borrower that funds the payment of market-rate interest by the borrower. The comparison suggests that it does not make sense to expect courts to deal adequately with the problem. The tax-avoidance potential of interest-free loans calls for a legislative or an administrative (rather than a judicial) solution.
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