The application of Section 19 and Paragraph 12a to the Settlement of Disputed Debts : a ‘concession or Compromise’ of Another Kind!

• Published date: 01 December 2020
• DOI: 10.10520/ejc-btclq-v11-n4-a2
• Author: Milton Seligson Seligson,
• Pages: 1-6
• Date: 01 December 2020

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The Application of Section19

and Paragraph 12A to the

Settlement of Disputed Debts:

A ‘CONCESSION OR COMPROMISE’ OF

ANOTHER KIND!

MILTON SELIGSON SC*

ABSTRACT

Section 19 of the Income Tax Act 58 of 1962 and paragraph 12A of the Eighth

Schedule to the Act govern the tax consequences of a concession or compromise

in relation to a debt. The former provision applies to income tax and the latter

to capital gains tax, when a concession or compromise gives rise to a debt benef‌it.

Section 19 applies when the amount of the debt owed was in respect of,

or was used to fund, directly or indirectly, any expenditure for which the Act

permitted a deduction or allowance. Paragraph 12A is applicable where the

amount of the debt owed was in respect of or was used to fund, directly or

indirectly, any expenditure, other than expenditure on trading stock in respect

of which a deduction or allowance was permitted under the Act. Thus, any

benef‌it that results from a concession or compromise as def‌ined, which is agreed

with the creditor, will be taxed accordingly.

The enquiry undertaken in this article is the role, if any, played by the two

provisions mentioned in the case where there is a disputed claim and a settle-

ment is entered into between the parties resolving the dispute or litigation that

is pending.

The author analyses the key def‌initions common to the two provisions and

concludes that, properly construed, there must be an existing debt owed by

a debtor to a creditor before they can apply. The article refers to important

Appeal Court authority on the ordinary meaning of ‘debt’, which supports the

analysis that a genuinely disputed debt is not an unconditional obligation and

cannot be said to be owed until the dispute concerning its existence has been

resolved.

The article further discusses the settlement of genuinely disputed debts by

way of an agreement of compromise and refers to clear judicial authority that

it is the essence of such an agreement that it settles a liability which is disputed

and uncertain. The analysis further relies on the established principle of tax

law that until a genuinely disputed claim has been admitted by the debtor

or resolved by a court it does not constitute an expense which is deductible,

because it is still conditional or contingent.

The article concludes that a genuinely disputed claim does not constitute a

debt owed as required by the provisions of section 19 and paragraph 12A, and

that those provisions would not apply where there is a settlement that results

in a compromise of the claim.

* Honorary Member, Cape Bar.