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Tax Implications of Debt Instruments With Equity Features

26 September 2013   (0 Comments)
Posted by: Author: Arnaaz Camay
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Author: Arnaaz Camay (ENS)

Anti-avoidance rules proposed to take effect on 1 January 2014

The 2013 draft Taxation Laws Amendment Bill ("DTLAB") was issued by National Treasury for public comment on 4 July 2013. In accordance with the Explanatory Memorandum to the DTLAB, the tax legislation currently contains an anti-avoidance rule that deals with debt instruments that have equity features ("hybrid debt instruments"). The anti-avoidance rule denies a deduction in respect of any amount paid or payable in terms of a hybrid debt instrument. However, the hybrid debt instrument remains a debt instrument for all other purposes of the Income Tax Act 58 of 1962 (the "Act").

The current anti-avoidance rules apply generally when a hybrid debt instrument is convertible into an equity instrument within a period of three years from the date of issue of that debt instrument. National Treasury have indicated that the deficiencies in the current legislation are:

  • the limitation of the conversion period to three years; and
  •  that the artificial classification of equity instruments as debt go beyond the conversion features.

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Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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