Debt relief: Tax inconvenience for companies already in financial distress

Abstract

Orientation: The Income Tax Act has tax consequences for both the debtor and the creditor when a debt is waived as a result of a concession or compromise. This article focuses on the income tax implications for the debtor. Research purpose: Even though symmetry is achieved when calculating the tax implications for the debtor, it causes inconvenience and economic hardship. The research identified examples of where deferral relief has been granted in the Income Tax Act, and this is used as a motivation to extend similar relief for the distressed debtor. Motivation for the study: Companies were already trading under tough economic conditions before the advent of coronavirus disease 2019 (COVID-19) The pandemic has compounded the situation and introduced new challenges; hence, debt waivers have become increasingly prevalent. Research approach/design and method: A qualitative research methodology was applied using the doctrinal approach in conducting the research. Main findings: Where a debt is waived in a company that is already in financial distress, this may lead to a recoupment and or capital gains that trigger immediate tax consequences for the company. Practical/managerial implications: The recoupment and/or capital gain, which is subject to tax, creates undue hardship, inconvenience on the already distressed debtor and further impacts the ability of South African Revenue Service (SARS) to collect the tax debt. Contribution/value-add: The authors seek to rectify the identified problem by suggesting that a legislative amendment be introduced to allow the distressed taxpayer relief through a deferral of inclusion in taxable income.

Keywords

• concession or compromise
• debt benefit
• recoupment
• capital gain
• section 19, paragraph 12a
• relief