Tax Debt Relief

If you or your company are liable for income tax, social security or VAT, what should you do?

Tax payers wishing to seek debt relief should find themselves feeling relief.

The rescheduling and cancellation of debts in the operating field has always been carried out. Such rescheduling and debt relief has been progressively applied in the present context of the economy, which has at the same in turn led to greater awareness on the part of the tax and financial institutions in South Africa. During years of taxation, which began before 1 January 2013, debt relief was generally liable to either personal tax, withholding tax on investment or gift tax.

One of the purposes of the rules at the inception of the scheme was to make sure that a person who was exempt from the payment of part of the amount owed would make that person liable for tax in his possession. In addition, the provision was intended to achieve tax asymmetry so that, while loss relief is available to the creditor, the liability is also assessed on the corresponding profits.

There has been a fundamental revision of the provisions in this area of tax legislation for the years of taxation starting on or after 1 January 2013. Under the new regulations set out in Section 19 of the Income Tax Act, No. 58 of 1962 (Act) and Section 12A of the 8th List of the Act, a new unified system was to be introduced to provide relief to those in difficulty who were not able to repay their debt.

These changes were necessary because the current arrangements would have been effective in undermining the commercial benefits of debt relief for borrowers in view of the tax potentially levied on them. Further significant changes to the debt relief regime were made in 2017, such as the establishment of final tax regime applicable to the transformation of debt into capital and to make sure that the regime applies in all cases where a debt is paid by a borrower and the lender obtains insufficient compensation for the debt (i.e. to combat certain abuse related to the debt relief).

Particularly important was the substitution of the triggers for the implementation of the pertinent clauses under a "debt reduction" by two new approaches, namely a "debt benefit" and a "concession or compromise". In addition, the changes provided that interest would be excluded from the scope of the debt forgiveness rule and that the conversion of debt into own funds would be restricted to agreements between entities that are part of the same group.

However, as is so often the case with the introduction of new tax laws to treat particular tax evasion schemes, various concern has been expressed about possible accidental effects arising from the implementation of recent tax changes. Thus, the most recent round of tax changes proposes attempts to remove the following misgivings addressed in the explanatory memorandum to the TLAB: the incorporation of changes in the condition ality of a debt as a "concession or compromise" could have the accidental effect of affecting legitime operations.

An example is that a lending institution is often asked to subordinate debts of affiliated entities, which would inadvertently cause debt forgiveness. The argument has been put forward that the introduction of a debt modification as a "concession or compromise" is a dull tool aiming to address a small group of tax payers and should therefore be abolished.

Substituting an undertaking for a debt has an adverse effect on agreements that do not lead to a deficit for the Treasury (e.g. the use of bridge loans) and should therefore be eliminated. The determination of the amount of a'debt benefit' by comparison of the face value of a debt before a'concession or compromise' with the fair value thereafter is burdensome for each individual occurrence and should therefore be eliminated.

Firstly, the Commission proposes to introduce a broader concept of "concession or compromise". In particular, any changes in the maturity of a bond will not give rise to the provisions unless those changes lead to an effective liquidation event-and, in particular, any changes in the maturity of the bond will not give rise to the provisions.

It has always been the aim to exempt non-interest-bearing participating mortgages from the scope of the debt relief provisions so that only interest-bearing debt transformed into own capital falls within the scope of the debt relief provisions. Therefore, the suggestion foresees the inclusion of a concept of "interest-bearing debt" where interest takes on the significance already given in s24J of the Act.

Each debt replaced by an interest-bearing debt also falls within the scope of the rules. In order to make clear when the new debt relief arrangements will be implemented, it is suggested to amend the definitions of debt service. To sum up, "debt service" comprises the following scenarios: If the debt is annulled, surrendered or transferred - the amount annulled, canceled or repaid; if a debt is repaid or a business combination takes place due to the fact that the borrower has acquired the debt receivable - the amount by which the nominal value of the debt receivable will exceed the fair value of the debt after such repayment or business combination;

With regard to the transformation of debt into equity capital if the applicant holds no interest in the borrower before the agreement - the amount by which the nominal value of the debt before the transformation will exceed the fair value of the securities owned or purchased as a consequence of or in connection with that transformation;

With regard to the transformation of debt securities into own capital if the subscription holder holds a participation, directly or indirectly, in the borrower before the agreement - the amount by which the nominal value of the debt before the transformation will exceed the amount by which the fair value of the securities owned by the holder or by the other entity after the transformation will exceed the fair value of the securities owned by that entity in that entity before the transformation.

In order to avoid duplication of count, it is suggested to insert concepts of "direct interest" and "indirect interest", which currently allow tax payers to decrease their "debt advantage" by increasing several levels of participation in the borrower society. Finally, it is suggested that a further concept of "market value" be included in the debt relief provisions.

At the core of the problem is the fact that the proposed text does not in itself explain the significance of the words'market value', but the aim of introducing this provision is to establish clarification on the date of determining the fair value of purchased stocks in the context of a debt to equity swap.

Debt relief regulations currently contain regulatory regulations that prefer the use of other legal regulations to the use of debt relief regulations. Specifically, these regulations generally govern, among other things, inheritance tax, gift tax and income tax. So the reason for this is the avoidance of tax doubles for the same business incident.

It is appropriate to amend the exemption from gift tax under the debt relief provisions so as to allow exemption only if the gift tax on a gift from a debt relief scheme is actually due. Debt relief arrangements should be modified so that if a'concession or compromise' occurs after the sale of a principal or value adjustment item, this leads to tax implications.

Tax legislation related to debt rescheduling and debt relief forms a complicated web of technological regulations, and while the supplementary amendment proposals will hopefully address some of the recent worries, it would be well to advise the taxpayer to keep his finger on the pulse of the times by examining the definitive amendment proposals and obtaining expert advise on the examination of debt rescheduling agreements in order to prevent accidental outcomes.