The minefield of debt restructuring

• Author: Roné La Grange
• DOI: 10.10520/EJC-16a8e28570
• Pages: 13-18
• Date: 01 June 2019
• Published date: 01 June 2019
• Record Number: btclq_v10_n2_a3

13

© SIBER INK

The Minef‌ield of Debt

Restructuring

RONÉ LA GRANGE*

ABSTRACT

A debtor that benef‌its from a concession or compromise in respect of a debt

could trigger a tax liability. The tax will not only add to the debtor’s f‌inancial

woes, but it could be extremely diff‌icult to accurately determine the amount

of tax, seeing that the tax implications of the debtor depend on the use of

the debt funding.

The taxing provision allow for legitimate ways in which to restructure debt

without resulting in a tax charge. Unfortunately, with the legislation trying

to cater for various scenarios it has become a minef‌ield, which can be chal-

lenging to manoeuvre when restructuring debt. 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 face taxation, unless

one of two exclusions 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, irrespec-

tive of the relationship between the debtor company and the creditor and

the application of the funds. Secondly, an exclusion applies to the conversion

of both the capital portion of debt and any unpaid interest where the debt

is owed between companies forming part of the same group of companies,

as def‌ined. The group of companies def‌inition excludes non-resident compa-

nies and the exclusion cannot be relied on in respect of cross border loans.

If the exclusion applies so as not to trigger tax on the conversion of unpaid

interest to shares, section 24J of the Income Tax Act could nevertheless apply

to require the debtor company to include in income the amount of interest

that was deducted but that was never paid.

Introduction

The Income Tax Act 58 of 1962 contains provisions that tax a debtor on

benef‌its resulting from a concession or compromise of a debt.1 The type of

tax consequences that could that could arise if the provisions are triggered

include:

(a) A recoupment of deductible expenses and allowances that were funded

by the debt. The recoupment is included in gross income, effectively

reversing the deduction previously claimed. One of the deductible

expenses funded by the debt could be interest. The debtor may have

1

* Tax partner, Bowmans Attorneys.

Section 19 and para 12A of the Eighth Schedule to the Income Tax Act.