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Amendments to the taxation of debt restructures

Wednesday, 31 January 2018   (0 Comments)
Posted by: Author: Carmen Gers and David Marais
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Author: Carmen Gers and David Marais (ENSafrica)

Since 1 January 2013, section 19 of the Income Tax Act, 1962 (the “Act”) and paragraph 12A of the Eighth Schedule to the Act (the “Eighth Schedule”) have determined the tax implications where a debt owing by a taxpayer is cancelled, waived, forgiven or discharged for no consideration (or for consideration that is less than the amount of the debt).

Broadly speaking, prior to the recent amendments brought about by the Taxation Laws Amendment Act, 2017 (the “TLAA”) detailed below, section 19 and paragraph 12A provided for the taxation of the “reduction amount”, which is the amount by which a debt is reduced less any consideration given by the debtor for the reduction (depending on how the funds raised by way of the debt was initially applied). Generally, section 19 applies to debts used directly or indirectly to fund expenditure in respect of which a deduction or allowance was granted in terms of the Act, with paragraph 12A being the capital gains tax equivalent.

Prior to the recent amendments under the TLAA, the scenario where a debt was settled through a capitalisation (ie, issuing shares) was not addressed by section 19 and paragraph 12A and was the subject of a number of binding private rulings (“rulings”) by the South African Revenue Service (“SARS”). Generally, the rulings provided that no tax implications would result from such “capitalisations” without specific reference to the value of the shares issued in settlement of the debt.

The TLAA, promulgated on 14 December 2017, substituted both section 19 and paragraph 12A in their entirety. These came into operation on 1 January 2018, applicable in respect of years of assessment commencing on or after that date.

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