Editorial

• DOI: 10.10520/EJC-16a8d7f802
• Author: Des Kruger
• Date: 01 June 2019
• Pages: v-vii
• Published date: 01 June 2019
• Record Number: btclq_v10_n2_a1

v

© SIBER INK

editorial

DeS KRuGeR

This month’s edition kicks off with an extremely important and erudite

article by Milton Seligson SC. The author discusses the use of the special

corporate rules in Part III of Chapter II of the Income Tax Act 58 of 1962

(‘the Act’), namely sections 41 to 47 thereof, which afford ‘rollover’ tax

relief to facilitate a corporate restructure of a group of companies.

Importantly, section 41(2) of the Act provides that the corporate rules

override any provision to the contrary in the Act, save for certain speci-

f‌ied provisions. The article notes that it is therefore of the utmost impor-

tance where a transaction under the corporate rules is involved to consider

whether any tax provisions that continue to apply in terms of section 41(2)

have any application.

The article illustrates how the corporate rules work in practice and

the methodology that has to be followed in analysing their application,

by posing a hypothetical group restructure as an example. The proposed

restructure steps are explained and their effect is discussed. Where they

may be applicable, anti-avoidance provisions of the corporate rules are

discussed, as well as provisions of the Act that may apply in terms of section

41(2) to override the tax relief provided by the special rules, including

section 24BA and paragraph 11(1)(g) of the Eighth Schedule to the Act. The

possible application of the recently amended paragraph 43A of the Eighth

Schedule is considered in the context of the unbundling transactions.

The second article by Roné la Grange is a welcome addition to the discus-

sion regarding the ambit of the, once again amended, debt-relief provi-

sions. A debtor who benef‌its from a concession or compromise in respect

of a debt could trigger a tax liability under the fairly recently adopted debt

relief provisions provided for in section 19 of the Act and in paragraph 12A

of the Eighth Schedule to the Act. The article highlights how diff‌icult it is

to accurately determine the amount of tax payable when debt is relieved

otherwise than for full value; especially given that the tax implications

depend on the use of the debt funding by the creditor.

Roné notes that, following years of debate, current legislation makes it

clear that where debt is converted into shares, in whatever manner, and the

shares issued by the debtor company have a lower value than the face value

of the debt, the debtor would incur a tax liability, unless one of two exclu-

sions apply. Firstly, a debt-to-equity conversion of the capital portion of

debt (not unpaid interest) will in all instances be excluded from the taxing

provisions, irrespective of the relationship between the debtor company

and the creditor and the application of the funds. Secondly, an exclu-

sion applies to the conversion of both the capital portion of debt and any