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News & Press: Opinion

Debt reduction

04 March 2014   (0 Comments)
Posted by: Author: Heinrich Louw
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Author: Heinrich Louw (Cliff Dekker Hofmeyer)

The rules in the Income Tax Act, No 58 of 1962 (Act) dealing with circumstances that involve the reduction of debt have in recent years been refined, especially by the introduction of s19 of the Act and paragraph 12A of the Eighth Schedule to the Act.

Generally, where a debt is reduced, whether by way of waiver, forgiveness of debt, compromise, or otherwise, there could be serious tax consequences for the debtor who is afforded the relief.

A debtor could realise recoupments, whether under section 8(4) or section 19 of the Act. Where one is dealing with debts related to capital assets, the reduction of debt could potentially result in the debtor having a lower base cost in respect of the asset or a reduction in assessed capital losses in terms of paragraph 12A.

However, Chapter 6 of the Companies Act, No 71 of 2008 has introduced the phenomenon of Business Rescue into South African company law, mainly with a view to assist ailing companies to become profitable again, in line with broader economic policy.

Business Rescue proceedings include a procedure whereby the debtor company can compromise with the creditor. Unfortunately, doing so could trigger the various tax consequences described above, leaving the debtor with a tax liability. 

This obviously defeats the purpose of Business Rescue and has negative consequences for economic growth. 

The Minister has announced that they will introduce relief measures for companies in such circumstances.

This article first appeared on cliffedekkerhofmeyr.com.


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