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Income Tax Act, 1962 (Act 58 of 1962)

Chapter II: The Taxes

Part I: Normal Tax

19. Concession or compromise in respect of a debt

 

(1)        For the purposes of this section—

 

'allowance asset' means a capital asset in respect of which a deduction or allowance is allowable in terms of this Act for purposes other than the determination of any capital gain or capital loss;

 

'capital asset' means an asset as defined in paragraph 1 of the Eighth Schedule that is not trading stock;

 

'concession or compromise' means any arrangement in terms of which—

(a)        any—

(i)        term or condition applying in respect of a debt is changed or waived; or

(ii)        obligation is substituted, whether by means of novation or otherwise, for the obligation in terms of which that debt is owed; or

(b)        a debt owed by a company is settled, directly or indirectly, by—

(i)        being converted to or exchanged for shares in that company; or

(ii)        applying the proceeds from shares issued by that company

 

'debt' means any amount that is owed by a person but does not include—

(a)        a tax debt as defined in section 1 of the Tax Administration Act; or

(b)        an amount of interest;

 

‘debt benefit’, in respect of a debt owed by a person to another person, means any amount by which the face value of the claim held by that other person in respect of that debt, prior to the entering into of any arrangement in respect of that debt, exceeds—

(a) in the case of an arrangement—
(i) described in paragraph (a) of the definition of ‘concession or compromise’, the market value of the claim in respect of that debt; or
(ii) described in paragraph (b) of the definition of ‘concession or compromise’, where the person who subscribed for or acquired shares in a company in terms of that arrangement did not hold shares in that company prior to the entering into of that arrangement, the market value of the shares,

held or acquired by reason or as a result of the implementation of that arrangement; or

(b) in the case of an arrangement described in paragraph(b) of the definition of ‘concession or compromise’, where the person who subscribed for or acquired shares in a company in terms of that arrangement held shares in that company prior to the entering into of that arrangement, the amount by which the market value of the shares held by that person in that company after the implementation of that arrangement exceeds the market value of the shares held by that person in that company prior to the entering into of that arrangement,

reduced, in the case of a debt owed by a company to a person who holds shares in another company that forms part of the same group of companies as that company, by so much of any increase in the market value of the shares so held by that person as is attributable solely to the implementation of that arrangement; and

‘group of companies’ means a group of companies as defined in section 41.

(2) Subject to subsection (8), this section applies 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.
(3) Where—
(a) a debt benefit arises in respect of a debt owed by a person as contemplated in subsection (2); and
(b) the amount of that debt was used as contemplated in paragraph(b) of that subsection to fund expenditure incurred in respect of trading stock that is held and not disposed of by that person at the time the debt benefit arises,

the debt benefit in respect of that debt must, to the extent that an amount is taken into account by that person in respect of that trading stock in terms of section 11(a) or 22(1) or (2) for the year of assessment in which the debt benefit arises, be applied to reduce the amount so taken into account in respect of that trading stock.

(4) Where—
(a) a debt benefit arises in respect of a debt owed by a person as contemplated in subsection (2);
(b) the amount of that debt was used as contemplated in paragraph (b) of that subsection to fund expenditure incurred in respect of trading stock that is held and not disposed of by that person at the time the debt benefit arises; and
(c) subsection (3) has been applied to reduce an amount taken into account by that person in respect of trading stock as contemplated in that subsection to the full extent of that amount so taken into account,

the debt benefit in respect of that debt, less any amount of that debt benefit that has been applied to reduce an amount as contemplated in subsection (3) must, to the extent that a deduction or allowance was granted in terms of this Act to that person in respect of that expenditure, be deemed, for the purposes of section 8(4)(a), to be an amount that has been recovered or recouped by that person for the year of assessment in which the debt benefit arises.

(5) Where—
(a) a debt benefit arises in respect of a debt owed by a person as contemplated in subsection (2); and
(b) the amount of that debt was used as contemplated in paragraph (b) of that subsection to fund any expenditure other than expenditure incurred—
(i) in respect of trading stock that is held and not disposed of by that person at the time the debt benefit arises; or
(ii) in respect of an allowance asset,

the debt benefit in respect of that debt must, to the extent that a deduction or allowance was granted in terms of this Act to that person in respect of that expenditure, be deemed, for the purposes of section 8(4)(a), to be an amount that has been recovered or recouped by that person for the year of assessment in which the debt benefit arises.

(6) Where—
(a) a debt benefit arises in respect of a debt owed by a person as contemplated in subsection (2); and
(b) the amount of that debt was used as contemplated in paragraph(b) of that subsection to fund expenditure incurred in respect of an allowance asset,

the debt benefit in respect of that debt must, to the extent that—

(i) a deduction or allowance was granted in terms of this Act to that person in respect of that expenditure; and
(ii) the debt benefit has not been applied as contemplated in paragraph 12A of the Eighth Schedule to reduce the amount of expenditure as contemplated in paragraph 20 of that Schedule in respect of that allowance asset,

be deemed, for the purposes of section 8(4)(a), to be an amount that has been recovered or recouped by that person for the year of assessment in which the debt benefit arises.

(7) Where a debt benefit arises in respect of a debt owed by a person that was used to fund expenditure incurred in respect of an allowance asset, the aggregate amount of the deductions and allowances allowable to that person in respect of that allowance asset may not exceed an amount equal to the aggregate of the expenditure incurred in the acquisition of that allowance asset, reduced by an amount equal to the sum of—
(a) the debt benefit in respect of that debt; and
(b) the aggregate amount of all deductions and allowances previously allowed to that person in respect of that allowance asset.
(8) This section must not apply to a debt benefit in respect of any debt owed by a person—
(a) that is an heir or legatee of a deceased estate, to the extent that—
(i) the debt is owed to that deceased estate;
(ii) the debt is reduced by the deceased estate; and
(iii) the amount by which the debt is reduced by the deceased estate forms part of the property of the deceased estate for the purposes of the Estate Duty Act;
(b) to the extent that the debt is reduced by way of—
(i) a donation as defined in section 55(1); or
(ii) any transaction to which section 58 applies; or
(c) to an employer of that person, to the extent that the debt is reduced in the circumstances contemplated in paragraph 2(h) of the Seventh Schedule;
(d) to another person where the person that owes that debt is a company if—
(i) that company owes that debt to a company that forms part of the same group of companies as that company; and
(ii) that company has not carried on any trade,

during the year of assessment in which that debt benefit arises as well as during the immediately preceding year of assessment: Provided that this paragraph must not apply in respect of any debt—

(aa) incurred, directly or indirectly by that company to fund expenditure incurred in respect of any asset that was subsequently disposed of by that company by way of an asset-for-share, intra-group or amalgamation transaction or a liquidation distribution in respect of which the provisions of section 42, 44, 45 or 47, as the case may be, applied; or
(bb) incurred or assumed by that company in order to settle, take over, refinance or renew, directly or indirectly, any debt incurred by—
(A) any other company that forms part of the same group of companies; or
(B) any company that is a controlled foreign company in relation to any company that forms part of the same group of companies; or
(e) to another person where the person that owes that debt is a company that—
(i) owes that debt to a company that forms part of the same group of companies as that company; and
(ii) reduces or settles that debt, directly or indirectly, by means of shares issued by that company:

Provided that this paragraph must not apply in respect of any debt that was incurred or assumed by that company in order to settle, take over, refinance or renew, directly or indirectly, any debt incurred by another company which—

(aa) did not form part of that same group of companies at the time that that other company incurred that debt; or
(bb) does not form part of that same group of companies at the time that that company reduces or settles that debt, directly or indirectly, by means of shares issued by that company.

[Subsection (1) amended by section 32(1) of Act No. 17 of 2017]

 

'reduction amount', in relation to a debt owed by a person, means any amount by which that debt is reduced less any amount applied by that person as consideration for that reduction.

 

(2) Subject to subsection (8), this section applies where a debt that is owed by a person is reduced by any amount and—
(a) the amount of that debt was used, directly or indirectly, to fund any expenditure in respect of which a deduction or allowance was granted in terms of this Act; and
(b) the amount of that reduction exceeds any amount applied by that person as consideration for the reduction.

 

(3)        Where—

(a) a debt owed by a person is reduced as contemplated in subsection (2); and
(b) the amount of that debt was used as contemplated in paragraph (a) of that subsection to fund expenditure incurred in respect of trading stock that is held and not disposed of by that person at the time of the reduction of the debt,

the reduction amount in respect of that debt must, to the extent that an amount is taken into account by that person in respect of that trading stock in terms of section 11(a) or 22(1) or (2) for the year of assessment in which the debt is so reduced, be applied to reduce the amount so taken into account in respect of that trading stock.

 

(4)        Where—

(a) a debt owed by a person is reduced as contemplated in subsection (2);
(b) the amount of that debt was used as contemplated in paragraph (a) of that subsection to fund expenditure incurred in respect of trading stock that is held and not disposed of by that person at the time of the reduction of the debt; and
(c) subsection (3) has been applied to reduce an amount taken into account by that person in respect of trading stock as contemplated in that subsection to the full extent of that amount so taken into account,

the reduction amount in respect of that debt must, to the extent that a deduction or allowance was granted in terms of this Act to that person in respect of that expenditure, be deemed, for the purposes of section 8(4)(a), to be an amount that has been recovered or recouped by that person for the year of assessment in which the debt is reduced less any amount of that reduction amount that has been applied to reduce an amount as contemplated in subsection (3).

 

(5)        Where—

(a) a debt owed by a person is reduced as contemplated in subsection (2); and
(b) the amount of that debt was used as contemplated in paragraph (a) of that subsection to fund any expenditure other than expenditure incurred—
(i) in respect of trading stock that is held and not disposed of by that person at the time of the reduction of the debt; or
(i) in respect of an allowance asset,

the reduction amount in respect of that debt must, to the extent that a deduction or allowance was granted in terms of this Act to that person in respect of that expenditure, be deemed, for the purposes of section 8(4)(a), to be an amount that has been recovered or recouped by that person for the year of assessment in which the debt is reduced.

 

(6)        Where—

(a) a debt owed by a person is reduced as contemplated in subsection (2); and
(b) the amount of that debt was used as contemplated in paragraph (a) of that subsection to fund expenditure incurred in respect of an allowance asset,

the reduction amount in respect of that debt must, to the extent that

(i) a deduction or allowance was granted in terms of this Act to that person in respect of that expenditure; and
(ii) paragraph 12Aof the Eighth Schedule has not been applied to reduce the amount of expenditure as contemplated in paragraph 20 of that Schedule in respect of that allowance asset to the full extent of that expenditure,

be deemed, for the purposes of section 8(4)(a), to be an amount that has been recovered or recouped by that person for the year of assessment in which the debt is reduced.

 

(7) Where a debt owed by a person that was used to fund expenditure incurred in respect of an allowance asset is reduced, the aggregate amount of the deductions and allowances allowable to that person in respect of that allowance asset may not exceed an amount equal to the aggregate of the expenditure incurred in the acquisition of that allowance asset, reduced by an amount equal to the sum of—
(a) the reduction amount in respect of that debt; and
(b) the aggregate amount of all deductions and allowances previously allowed to that person in respect of that allowance asset.

[Subsection (7) amended by section 35 of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

(8) This section must not apply to any debt owed by a person—
(a) that is an heir or legatee of a deceased estate, to the extent that—
(i) the debt is owed to that deceased estate;
(ii) the debt is reduced by the deceased estate; and
(iii) the amount by which the debt is reduced by the deceased estate forms part of the property of the deceased estate for the purposes of the Estate Duty Act.

[Subparagraph (iii) amended by section 30 of Act No. 43 of 2014]

(b) to the extent that the debt is reduced by way of—
(i) a donation as defined in section 55(1); or
(ii) any transaction to which section 58 applies; or
(c) to an employer of that person, to the extent that the debt is reduced in the circumstances contemplated in paragraph 2(h) of the Seventh Schedule.