The reduction of debt and taxation : some takeaways

• Author: Des Kruger
• DOI: 10.10520/EJC194779
• Pages: 11-22
• Date: 01 January 2016
• Published date: 01 January 2016

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© SIBER INK

The Reduction of Debt and

Taxation:

SOME TAKEAWAYS

DES KRUGER1

ABSTRACT

As most tax-orientated people will be aware, a new income-tax and capital-

gains-tax (CGT) regime has been introduced that deals specif‌ically with debt

reduction, by whatever legal means the debt is reduced. Where any debt owed

by a person is reduced and that debt was used to fund, whether directly or indi-

rectly, expenditure in respect of which a deduction or allowance was granted

in terms of the Income Tax Act 58 of 1962 (the IT Act), and the amount of that

reduction exceeds any consideration given by the debtor for such reduction,

the provisions of section 19 of the IT Act apply. Depending on the nature of the

expenditure, certain income-tax implications are triggered. Should such debt

have funded expenditure incurred in respect of assets, paragraph 12A applies

and certain CGT implications are triggered. This article brief‌ly discusses the

ambit of these two fairly new provisions.

A number of issues arise in relation to the new provisions, as well as other

issues relating to debt reduction in general, and these issues (takeaways) are

discussed in more detail.

The f‌irst issue is: in what circumstances will a debt be regarded as having

been ‘reduced’? The author notes that a debt is nothing other than a contrac-

tual obligation to discharge an amount owing at some point in time, and in

a manner agreed upon. The debt may be discharged in many ways, such as,

for example, payment, merger, set-off, prescription or release. These different

methods of discharge and their requirements are considered in this article.

The most contentious issue in this regard seems to be the issue of shares as a

means of discharging the liability. This aspect is considered and the conclusion

reached that this is an acceptable method of consideration, but it is important

to ensure that the subscription price for the shares equal the market value of

the shares issued.

The appropriation of the debt reduction is also canvassed. An issue may

arise where the creditor forgives all or part of a debt owing and the debtor has

utilised the funds to acquire various goods or services. Given that the provisions

of section 19 and paragraph 12A rely on a connection between the nature of

the expenditure incurred and the funds provided by the creditor, the question

arises as to how one is to appropriate the waiver of the debt. Clearly the debtor

would benef‌it enormously if it was able to apportion the amount of the debt

waived, apportioning the amount of debt waived f‌irst to those expenditures/

assets that will trigger the least amount of tax, such as capital goods. Both

ENSafrica and SARS suggest that a proportional allocation would be fair and

reasonable, while the article questions whether one should not apply the

1

Tax Specialist.