The debt-waiver rules and their exemptions

• Jurisdiction: South Africa
• Date: 01 December 2014
• Published date: 01 December 2014
• DOI: 10.10520/EJC173375
• Pages: 52-63
• Published By: Siber Ink
• Author: Nicola Bird,Michael Rudnicki

52 © SIBER INK

The Debt-Waiver Rules and

their Exemptions

MICHAEL RUDNICKI1 • NICOLA BIRD2

ABSTRACT

Section 19 and paragraph 12A of the Act3 were introduced from 1 January

2013 to clarify the tax implications arising upon the waiver or reduction of

a debt. These provisions contain various exemptions specifying the instances

where the debt-waiver provisions will not apply. This article summarises the

debt-waiver provisions contained in the Act in the context of the exemptions

provided, and explores the purpose and efficacy of certain exemptions which

may typically find application in a corporate environment. Three exemptions

are focused on for purposes of this article, namely the group-of-companies

exemption, the donations-tax exemption and the liquidation/deregistration

exemption.

The debt-waiver provisions will either give rise to income tax implications

(in the form of a reduction of cost of stock or recoupments)4 or CGT implica-

tions (in the form of a reduction of tax base cost or assessed capital losses

carried forward),5 depending on the purpose for which the loan was used.

The group-of-companies exemption is only provided for in paragraph 12A,

and exempts the debtor from a reduction of tax base cost or assessed capital

losses, where a debt is waived by a creditor who forms part of the same

group of companies as the debtor. The nuance arising when this exemption

is applied in the context of an allowance asset (on which tax capital allow-

ances have historically been claimed), is how this provision interacts with the

recoupment provision contained in section 19(6) of the Act. It is submitted

that the utilisation of the group-of-companies exemption where debt was

used to fund allowance assets may give rise to more substantial recoupments

in the debtors’ hands than would otherwise be the case if this exemption was

not applied.

With regard to the donations-tax exemption, it is submitted that it is unlikely

that this exemption will apply in most corporate debt-waiver scenarios. This

is because a debt waiver is unlikely to be motivated by some form of gratui-

tous intent on the part of the creditor. In the context of the application of

the deemed donation, provisions to a debt waiver undertaken in a corpo-

rate environment, given the extraordinarily wide ambit of the provisions, it

is submitted that the provision must be read in the context of Part V of the

Act, with the result that some form of intention to donate must be present

from the creditor’s perspective, with the result that the application of these

provisions in a corporate debt-waiver context may be limited. In addition,

these provisions should be considered in light of all facts and circumstances

1

Tax Director: KPMG.

2

Senior Manager, KPMG M&A Tax Practice.

3

Income Tax Act 58 of 1962. All references to ‘Act’ hereunder refer to this Act.

4

Section 19 of the Act.

5

Paragraph 12A of the Eighth Schedule to the Act.