Refinancing Preference Shares: When Interest Stops Being Fully Deductible
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Refinancing transactions often appear straightforward, replace one form of funding with another and continue operating as usual. But from a tax perspective, the detail matters. In Binding Private Ruling 424, SARS considered a project finance structure where preference shares were later redeemed and replaced with long-term debt. The critical question was whether the interest on the new loan would be fully deductible under section 24J.
How the funding was structured
The bank didn’t just lend money in one straight loan. Instead, the funding was split into two components from the start:
40% – Senior JIBAR Loan (the Initial Loan)
This was ordinary debt. It funded construction costs, start-up costs, working capital and even capitalised interest during the build phase.60% – Redeemable Preference Shares
Instead of lending this portion, the bank subscribed for preference shares in the company. The proceeds were also used to fund construction and start-up costs.
These preference shares:
Ran for seven years
Carried cumulative, preferential dividends
Allowed some dividend deferment during early years
Could not be redeemed unless all accumulated dividends were paid.
So economically, they looked and felt like debt. But legally, they were shares.
The built-in refinance
From day one, the structure included a second facility, the Post-Construction Senior JIBAR Facility (the New Loan). The idea was simple, once construction was complete and the project operational, the company would:
Redeem the preference shares
Pay any unpaid dividends
Replace them entirely with long-term senior debt
After that point, the bank’s exposure would sit purely as loan funding — no more preference shares.
The New Loan had a 20-year term and could be drawn to fund both the redemption amount and the accumulated dividends.
The tax problem
The critical issue arises when the company draws the new loan to repay the preference share capital or settle accumulated dividends, can it deduct the interest on that new loan under section 24J?
SARS’ conclusion
SARS split the answer.
👉Interest on the portion of the New Loan used to redeem the preference shares (capital amount) is deductible.
👉Interest on the portion used to pay accumulated or current dividends is not deductible.
The reason being is that replacing one form of income-producing funding with another is part of running the business. That supports deductibility. But dividends are distributions of profit, they do not produce income. Borrowing money to pay dividends does not create taxable income. Therefore, the interest on that portion fails the test.
The practical lesson
This ruling reinforces a principle every practitioner should remember:
Deductibility follows the use of funds, not the commercial label of the transaction.
You cannot simply say, “It’s refinancing, therefore interest is deductible.” You must trace the money.
If even part of the loan funds dividend payments, you must apportion the interest.
Why this is important
Take note if you’re advising clients on:
Project finance
BEE funding structures
Preference share arrangements
Group refinancing transactions.
You are expected to know the tax consequences before SARS knocks on the door. Refinancing is not neutral, its structure determines tax. Technical accuracy is what separates a form-filler from a strategic adviser.
This Binding Private Ruling applies only to the specific applicant to whom it was issued and is valid for a period of 10 years from 12 December 2025.
