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When debt is reduced or written off, certain adverse tax consequences may arise for the debtor. The tax provisions dealing with the debt relief rules are contained in section 19 and paragraph 12A of the Eighth Schedule to the Income Tax Act, 1962 (the “Act”). The current debt relief rules were introduced by the Taxation Laws Amendment Act, 2017 and are applicable in respect of years of assessment commencing on or after 1 January 2018.
The trigger for the application of these debt relief rules is a “concession or compromise”. The definition of “concession or compromise” as it currently reads is widely worded with the result that a change to the terms of a loan, for example, the redenomination of the currency of a loan from say, USD to ZAR, may trigger the debt relief rules. The Draft Taxation Laws Amendment Bill, 2018 (“Draft TLAB”) proposes amendments to section 19 and paragraph 12A. If promulgated, the proposed amendments will have the welcome result that by merely changing the term of a loan, the provisions of paragraph 12A and section 19 should not be triggered.
This article briefly sets out the debt relief rules in the context of a change to the terms of a loan under current legislation and the proposed amendments in the Draft TLAB which are relevant in this regard.
Discover more: Welcome tax proposals to the debt relief rules
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In conclusion, the proposed amended definition of “concession or compromise” in the Draft TLAB is to be welcomed. It clarifies that changes in the terms and conditions of taxpayers’ debt arrangements that do not give rise to realisation events should not trigger the debt relief rules in the Act. In our view, this an equitable outcome as the application of the debt relief rules in instances that do not result in a realisation event may have adverse tax consequences for taxpayers without giving rise to a corresponding loss to the fiscus.