The Taxation Laws Amendment Bill, 2017: far-reaching changes to debt reduction rules
01 Dec 2017
The new South African Taxation Laws Amendment Bill, 2017 (the “TLAB 2017”) was released following the public consultation process for the Draft Taxation Laws Amendment Bill, 2017 (the “Draft TLAB 2017”). While some of the changes in the TLAB 2017 following submissions made on the Draft TLAB 2017 are welcome, others are problematic. The significant changes to the debt reduction rules in section 19 of the Income Tax Act, 1962 (the “ITA”) and paragraph 12A of the Eighth Schedule to the ITA discussed below will likely have taxpayers thinking twice before changing existing loan agreements.
The new section 19(2) of the ITA provides that section 19 will apply where “(a) a debt benefit in respect of a debt owed by a person arises by reason or as a result of a concession or compromise in respect of that debt; and (b) the amount of that debt was used by that person to fund, directly or indirectly, any expenditure in respect of which a deduction or allowance was granted in terms of this Act.” The same corresponding changes were made to paragraph 12A of the Eighth Schedule to the ITA.
Historically and in the Draft TLAB 2017, section 19 (and paragraph 12A of the Eighth Schedule) only referred to a “reduction amount”, which is basically the amount by which an existing debt in the hands of the debtor was reduced minus consideration given for that reduction. The overhaul of section 19 and paragraph 12A of the Eighth Schedule in the TLAB 2017, inter alia, removes the concept of “reduction amount” and introduces the concepts of “debt benefit” and “concession or compromise”. The extreme position arises in relation to the definition of “concession or compromise”, which specifically includes “any arrangement in terms of which:
i. term or condition applying in respect of a debt is changed or
ii. obligation is substituted, whether by means of novation or otherwise, for the obligation in terms of which that debt is owed…”
Changes to any terms or conditions applying to existing loan agreements would give rise to a “debt benefit” where the face value of the debt exceeds the market value thereof as a result of the change. The change to the term or condition need not result in a new debt or novation of the existing debt (as per the “or” in the definition of “concession or compromise” between (a)(i) and (a)(ii)), so it can be any change that will result in a change in the market value of the loan.
On the assumption that the exclusions do not apply, this will trigger the implications of section 19 of the ITA or paragraph 12A of the Eighth Schedule to the ITA, ie, a recoupment of deductions or allowances previously claimed in the hands of the issuer and potentially recoupable interest.
This will have far-reaching consequences for changes to loan agreements that are normal in the course of business, for example:
- amending the debt covenants in an existing loan agreement;
- changing the interest rate; or
- extending the repayment date.
Taxpayers must be aware that changes to loan agreements not intended as a concession or compromise may have tax consequences.
This article was reviewed by Kristel van Rensburg, a director in ENSafrica’s tax department.