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Debt restructuring - practical considerations
In response to the number of companies struggling during the global financial crisis, new rules were introduced in the Income Tax Act governing the tax consequences flowing from the reduction or waiver of debts. Taxand South Africa explains the updated legislation.
The intention of the new legislation was to establish a mechanism which facilitated debt reductions without creating an additional obligation to pay further tax.
To comply with the new rules it is important to identity the purpose for which the funds were borrowed. However, in practice this may not always be easy to find. The reason for this is that if the debt was used to fund deductible expenditure or an allowance asset, the debt reduction or discharge will be taken into account in terms of the ordinary revenue rules. The rules for capital gains apply as a residual category. Once the purpose of the debt is identified, then the relevant ordering rules will apply in determining the tax treatment of the debt reduction or waiver.
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