Proposed Relief in Respect of Intra-Group Debt Used to Fund Revenue Expenditure

By Gerwin Vos, Corporate Tax Consulting Manager

Debt relief has become a familiar subject in the current economic climate. In the absence of group taxation in South Africa, intra-group debt relief often had unforeseen tax consequences. In lieu of writing-off intra-group debt, companies often settle through share issues.

However, proposed changes in the Draft Taxation Laws Amendment Bill may bring welcome reprieve.

Currently, intra-group debt applied to acquire capital assets may be exempt from tax. However, no exemption is currently available if the debt was used to fund operational expenditure, trading stock, or assets, if a capital allowance was claimed.

The proposed amendments will exempt debt relief granted to dormant companies from tax if certain criteria are met. If the debt is converted to shares, an exemption will apply to companies in a group when the debt arose and settlement was made. Interest expenditure claimed as a deduction by the creditor, and not included as income by the borrower, should be applied to reduce the debtor’s assessed loss. Interest exceeding the assessed loss (or if no assessed loss had existed) must be recouped in three years from the settlement of debt date.

It is also important to note that the entities need to remain part of the group of companies for at least five years after date of settlement through shares. If not, the amount by which the market value of the shares exceeds the face value of the debt settled must be included in the gross income of the debtor.

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