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Debt restrictions

Friday, 01 March 2013   (0 Comments)
Posted by: Erich Bell
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SARS 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.

In 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.

It 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.

Debt 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.

The deduction of interest on acquisition debt will also be limited.

Companies 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.

Source: Heinrich Louw, Associate, Tax, Cliffe Dekker Hofmeyr



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