Set–off : the old versus the new debt-reduction rules

• Record Number: btclq_v9_n2_a4
• Pages: 13-18
• Date: 01 June 2018
• DOI: 10.10520/EJC-f567186f1
• Author: Des Kruger,Carmen Moss-Holdstock
• Published date: 01 June 2018

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Set–off:

THE OLD VERSUS THE NEW DEBT-REDUCTION

RULES

CARMEN MOSS-HOLDSTOCK* • des kruger†

AbstrAct

In this article the authors consider the provisions of the old debt-reduction

rules and consider the ambit of the new concession or compromise rules in

the context of a subscription arrangement whereby debt owing by a debtor

company is extinguished by set-off against the debt owed by the creditor in

respect of the subscription price. While it is apparent that the South African

Revenue Service (‘SARS’) has taken a fairly lenient position in a number of

Binding Private Rulings (‘BPR’) in regard to the issue as to whether set-off in

these circumstances fell within the ambit of the old debt reduction provisions

(which SARS held it did not), the authors conclude that such set-off arrange-

ment would certainly constitute a ‘concession or compromise’ as contem-

plated in the new provisions.

However, while it is concluded that a set-off arrangement of the nature

contemplated here would constitute a ‘concession or compromise’ for

purposes of the new rules, no tax implications arise in the absence of a ‘debt

benef‌it’. In order to determine whether a debt benef‌it can be said to arise

in consequence of the set-off arrangement, it is necessary to determine the

market value of the shares obtained in exchange for the debt, and if the debt

exceeds such market value (or difference in market value if the creditor held

shares in the debtor company prior to the set-off agreement) and only if the

debt exceeds such market value or amount is section 19 and paragraph 12A

of the Income Tax Act, 1962 triggered — depending of course on the nature

of the expenditure incurred in respect of the debt.

Introduction

The Taxation Laws Amendment Act 17 of 2017 (‘TLAA’), promulgated on

18 December 2017, provided for signif‌icant changes to the debt-reduction

rules (the ‘new rules’) as set out in section 19 and in paragraph 12A (the

‘old rules’) of the Eighth Schedule to the Income Tax Act 58 of 1962 (‘the

Act’).

Of critical importance is the issue whether the set-off of the amount of

debt owed by a debtor company to a creditor against the subscription price

payable by the creditor to the debtor in consequence of the acquisition

of shares in the debtor company by the creditor fall within the ambit of

the new ‘concession or compromise’ debt provisions. It is evident that the

* Head of Tax, WTS-South Africa (Pty) Ltd.

† Consultant, Webber Wentzel.