01 March 2013
Posted by: Erich Bell
will once again be focussing on restricting interest deductions on certain debt
and debt instruments as it was proposed that certain provisions will be
introduced in respect of artificial debt, connected person
debt and certain acquisitions of debt.
a previous Bill provisions regarding the re-characterisation of debt
instruments with certain equity features (so-called artificial debt
re-characterisation) were introduced. These provisions did however not make it
into the final Amendment Act. It is now proposed, without giving any specifics,
that debt instruments that will not realistically be
repaid within 30 years, or convertible debt-instruments, will be
re-characterised as shares and interest deductions in respect of such
instruments would therefore not be allowed.
is noted that these provisions will not apply to banks and insurers, which
should provide some relief for those who have issued such instruments in the
context of certain funding transactions.
issued to creditors who are connected persons are also to be curtailed in
circumstances where the creditor is an exempt entity such as a public benefit
organisation. Ordinarily the taxpayer would be able to claim an interest
deduction, but SARS cannot tax the exempt entity. It is proposed that
deductible interest on such debt does
not exceed 40% of earnings, after taking into account other interest. Any
excess interest can however be rolled over for up to five years.
deduction of interest on acquisition debt will also be limited.
can often secure large interest deductions in this regard that effectively
eliminates their taxable income over a long period.
Exact details were not provided and it will be
interesting to see how SARS intends to implement this policy decision.
Louw, Associate, Tax, Cliffe Dekker Hofmeyr