What’s the Taxation Laws Amendment Bill?
The Taxation Laws Amendment Bill (TLAB) was released on the 24 October 2018 and contains some notable amendments and provisions. Some of the notable changes include:
- Creating more flexibility around retirement fund withdrawals and transfers.
- The introduction of exemptions for lower-income earners who receive loans from their employers for housing purposes.
- The introduction of a 1-year ‘characterisation rule’ for collective investment schemes.
- Bolstering anti-avoidance rules with regards to dividend stripping.
- Stronger rules and regulations around the use of trusts to defer taxation.
The Bill has also introduced new debt relief provisions which will take effect from 1 January 2019. These ensure that those who undergo debt relief still pay their tax, consider the role of interest, and seek to remove ambiguity with regards to the realisation of these provisions. The details of the amendment are explored in greater detail below.
Background of Debt Relief Provisions : Problems and Amendments
The debt relief provisions outlined in section 19 and paragraph 12A of the Act were introduced in 2013. When debt is relieved (by either being reduced or completely waivered), there may still be tax related consequences for the debtor. The newly enacted debt relief provisions seek to incorporate any tax benefits that a relieved debtor might experience into the tax net, especially in situations where the debt was acquired to fund tax-deductible expenses or to fund capital or allowance assets. Ultimately these changes have occurred to tackle tax avoidance and to clarify the circumstances that trigger tax realisation.
Due to government concern over tax avoidance, the above provisions were amended in the 2017 legislative cycle. However, the 2017 changes created some problems with regards to their practical implementation. Most significantly they stated that any change to terms and conditions could result in taxation. This had the unfortunate result of creating a situation where tax could be triggered by ‘unrealised’ events. Thus, amendments needed to occur to ensure that the new provisions could be practically realised without problems or ambiguity.
To address these problems, SARS released the Bill on 24 October 2018 and amended the following:
- The definition of “concession and compromises” so that they could be more meticulously defined and less open to uncertainty.
- The exclusion of the capitalisation of debts through currency conversion or exchange. Or through applying the proceeds of a share issue to the settlement of debt
Concessions and Compromises : Resultant Debt Benefits
Regarding section 19 and paragraph 12A, a “concession or compromise” was originally defined as; “any arrangement of which any term or condition applying in respect of debt is changed or waived.”
This wording was incredibly broad and created practical implementation problems. TLAB amended this wording so that “concession or compromise” was more methodically defined and only include events that resulted in a “debt benefit” to the debtor, rather than situations where no debt benefits would arise.
The following scenarios will fall under the definition of “concession or compromise” per section 19 and paragraph 12A of the Act:
- In the case of cancellation, waiver, or remittance:
- The debt benefit arises from an amount cancelled, relinquished or remitted
- Redemption of the debt claimed, e. settlement of the claim in respect of the debt by the debtor or by any connected person about the debtor:
- The debt benefit arises when the amount of the claim before redemption exceeds the expenditure incurred in redeeming the debt.
- Redemption through merger, e. operation of law because of the debtor acquiring the claim in respect of the debt:
- The debt benefit arises when the value of the claim, in respect of the debt before redemption, exceeds the expenditure incurred in the acquiring of the claim in respect of the debt.
- The direct or indirect settlement of debt through the conversion to/or exchange for shares in the debtor company, or the direct or indirect settlement of a debt by applying the proceeds from shares issued by the debtor company:
- Where the acquirer of the shares does not hold an effective interest in the shares of the debtor:
- The debt benefit arises when the amount by which the face value of the claim in respect of the debt exceeds the market value of the shares acquired.
- The direct or indirect settlement of a debt by applying the proceeds from shares issued by the debtor company:
- The amount by which the face value of the claim exceeds the amount by which the market value of any effective interest in shares in the debtor’s company has increased solely as a result of the arrangement.
Debt Relief Provisions Exclusions
TLAB also amended the exclusion that allowed for the capitalisation of debts through currency conversion or exchange and through applying the proceeds of a share issue to the settlement of a debt. Capitalisation occurs when something is regarded as an asset, rather than as an expense.
- Capitalisation of accrued unpaid interest:
- When a company capitalise accrued interest, they simply add up all the interest that they owe since their last debt repayment and add this amount to their loan balance or long-term asset. TLAB reintroduced interest into the definition of debt in section 19 and paragraph 12A of the Act to address the waiver or capitalisation of any interest that will fall within the provisions.
- This capitalisation exclusion does not apply to any portion of the debt involving the interest incurred by the debtor, during any year of assessment. To determine if any adverse tax consequences are triggered, a taxpayer will need to apply the debt benefit test to determine the interest portion of the loan. This test checks whether interest will also be counted as debt.
- Interest bearing and interest-free loans may be capitalised without triggering debt relief provisions.
- Local group of companies’ exclusions relaxed
The capitalisation exclusion which allows for the capitalisation of debt will no longer be limited to local groups of companies as the exclusion will also apply to the capitalisation of all loan capital.
Since debt relief regulations are relevant to many commercial agreements, it’s important for taxpayers to understand these changes. As this law will work retrospectively, it’s essential to be on board and understand the implications of these provisions.
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