The Interaction Between the Debt Reduction Rules and Other Provisions of the Income Tax Act
Having gone through a number of substitutions and amendments, the debt reduction rules contained in section 19 of the South African Income Tax Act, 1962 (the “Act”) and paragraph 12A of the Eighth Schedule to the Act now provide for the implications arising for a debtor where a debt owed to a creditor is waived, cancelled or capitalised by way of the issue of shares etc.
The question then arises: how do these rules interact with other provisions of the Act?
Consequential amendments have been made to a number of provisions in the Act to prevent “double counting” where the amended debt reduction rules find application. Further, section 19 and paragraph 12A also interact with pre-existing provisions in the Act. For transactions in respect of capital assets between “connected persons” (as defined in section 1 of the Act), these provisions include:
Transactions involving debt waivers, redemptions etc, must therefore be considered carefully to ensure that all the implications are accounted for correctly in the relevant debtor and creditor’s tax returns. This is important since while SARS may not make an assessment three years after the date of an original assessment, these limitations will not apply if there has been,inter alia, non-disclosure of material facts by the taxpayer.
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