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Business rescue and tax

Tuesday, 25 March 2014   (0 Comments)
Posted by: Author: Daniel Terblanche
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Author: Daniel Terblanche (Mazars)

Chapter 6 of the Companies Act 71 of 2008 (the Companies Act) introduced the concept of Business Rescue. At the core of this process are the consideration, adoption and implementation of the business plan by the body of creditors. 

It is our experience, in the majority of the business rescue plans we implement as part of our assignments that we enter into some sort of compromise with creditors. These plans spell out the extent to which the company may be released from the payment of its debt. Once a plan has been adopted (accepted by shareholders and the Board), it is binding on the company and its creditors. The effect of the adopted plan is that the majority of creditors will lose the right to enforce the relevant debt or part thereof to the extent that the creditor has acceded to the discharge of the debt. 

There are, however, serious VAT implications of debt relief for debtors who are VAT vendors. The net effect from the debt relief is that the debtor will suffer some form of tax consequence as the result of the debt relief. This appears to be counterintuitive, especially when provisions like the Business Rescue regime were specifically created by the Companies Act to assist businesses in financial distress. 

A compromise with creditors cannot be specifically provided for as a solution in one piece of legislation, only to create further liabilities for the distressed entity in another. This is made all the more absurd when it is recognised that one of the debts a debtor may have compromised or reduced are taxes owing to SARS. While many tax consequences raised are often absorbed by any assessed loss the debtor may have, it must be borne in mind that preserving an assessed tax loss is, in itself, important in assisting a distressed debtor, as the assessed loss will shelter the debtor from paying tax should the trading activities of the debtor again start to generate the much anticipated profit. 

It is therefore important to endeavour to bring the financial year end returns, PAYE and VAT returns up to date, as it will be necessary to review the company’s financial position as at the effective date. One needs to know whether there are any assessed tax losses before the business rescue plan can be drafted, especially where the core of the business plan is based on a compromise of debt with its creditors. It must, however, be noted that it is not always possible to bring all the relevant returns up to date during the very short time frame afforded by the Act to finalise an assignment.  

We find that the year-end financial returns, in the majority of business rescue assignments, are not up to date. This creates difficulty for SARS to compile their claims and results in them submitting assessed claims. SARS has, on a number of occasions, raised this issue as they feel they are being prejudiced by not having sufficient information to calculate their claims. SARS, on some of our recent assignments, have informed us that any pre-commencement returns filed after the effective date will be treated as a post-commencement liability. They expect to be settled in full on any liability accrued from these returns. This point of view would, however, appear not to be supported by any legislation and might only be resolved when brought before Court for a judicial ruling. 

As Business Rescue practitioners we endeavour to bring the tax affairs on any of our assignments up to date but, in some instances, this is not possible due to the time constraints of the prescribed business rescue process. Despite consulting and instructing the company’s accountants upon appointment, to update the financials these are normally only finalised when the assignment has been substantially implemented. Should SARS’ argument be correct, it would again place financial pressure on the company (post substantial implementation) and may result in the company being forced back into financial distress. 

In a recent assignment, SARS, the major creditor, was amenable to extending the time frames for publishing the business rescue plan to allow the income tax returns to be submitted. This was done to ensure the full liability of the taxes due could be calculated with more certainty.  

The latter is also a good example of an affected person acting in the interest of the fiscus, with a view to rescuing the company and ensuring continuation of the payment of taxes, which in turn supports the economy and ensures job losses are averted. Business Rescue, as the alternative to liquidation, has come a long way since its inception and can be attributed to the increase in recent successful substantial implementations. There has been an increase in support of the process by both financial institutions and SARS, whom have assisted create better exit routes for creditors than under liquidation circumstances.   

There are still a number of uncertainties within the business rescue process especially from a tax perspective, but is it clear that the process is adding value under the correct circumstances.



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