• Service: Tax, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 8/12/2013

South Africa - Tax consequences of debt reduction transactions 

August 12: South Africa’s Taxation Laws Amendment Act, 2012, includes provisions that revise the tax treatment of debt reduction transactions (i.e., transactions whereby the value of an outstanding debt is reduced for less than full consideration) entered on or after 1 January 2013.

The tax consequences of debt reduction generally turns on the allocation of the debt reduction amount to specific expenditure types under a “waterfall” basis.

Practically, these “waterfall” rules pose a challenge in the case of partial debt reductions—for example when a single debt is used to fund different expenditure items, such as trading stock, interest, wages and capital assets. In such instances, it may be preferential for taxpayers to allocate the debt reduction amount first to allowance assets, or other capital assets, that have high base cost (and that could shield immediate tax liability).

Since the new rules do not provide for a method of allocating the debt reduction in the above circumstances, it remains to be seen whether South African Revenue Service (SARS) will consent to any specific allocation that may be more advantageous to taxpayers.

While the objective of the new tax reduction rules is to make it easier for companies (especially companies that are financially distressed) to eliminate group debts in a tax neutral fashion, the rules are complex. Prudent taxpayers would take proper advice before embarking on any debt reductions.

Read an August 2013 report prepared by the KPMG member firm in South Africa: Debt Waivers: Reduction/Cancellation of debt

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