n Business Tax and Company Law Quarterly - Equity-linked notes - interest-bearing?

Volume 2, Issue 4
  • ISSN : 2219-1585


The provisions of section 24J of the Income Tax Act 58 of 1962 are complex even when dealing with vanilla debt instruments. However, when more exotic instruments, such as equity linked notes ('ELNs') are transacted, where returns on investment are dependent, not on a fixed or vanilla variable interest rate (such as the prime interest rate), but a rate the basis of which is measured by reference to a equity variable, not only does the calculation of the interest charge become more complex, but the question of whether the entire ambit of section 24J is applicable must be explored.The 'interest-bearing' nature of an ELN must have regard to the intention of the parties. If the intention of the parties is to consummate a transaction whereby funds flow from a creditor to a debtor, in that capacity, and the transaction involves the servicing of the capital outlay in the form of compensation, then the transaction is likely to involve a loan arrangement as contemplated in section 24J. Section 24J then becomes relevant to the extent that the instrument is 'interest-bearing'. An ELN that has the features of a loan arrangement by which the return payable to the lender is calculated with reference to an equity index, will meet the requirements of section 24J if the equity index movement constitutes the basis for determining the 'rate of interest'. The impact of section 24J will spread the variable returns over the term of the instrument on an effective yield methodology.

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