n Business Tax and Company Law Quarterly - Waiving debt : the fiscal price of forgiveness

Volume 1, Issue 1
  • ISSN : 2219-1585


The purpose of this article is to explore the tax treatment under the Income Tax Act (ITA) and the legal principles applicable, when a creditor agrees to waive or discharge a debt owed to it, or to receive less than the face value of the debt. Various provisions in South African tax legislation come into play when debt forgiveness occurs. Their scope and implications need to be fully understood by taxpayers who may be debtors or creditors involved in a debt waiver.The article deals with the contractual nature of debt waiver and the meaning of 'debt'. Provisions of the ITA that are likely to have an impact on the debtor's tax position are examined, including relevant provisions of the Eighth Schedule dealing with the capital gains tax (CGT) liability of a debtor where the debt is reduced or discharged. Recent case law relating to the relevant provision (paragraph 12(5)) is analysed and discussed. The potential income tax and CGT consequences for the creditor are also explored. Finally, consideration is given to novel questions concerning the applicability of certain provisions in the Value-added Tax (VAT) Act arising from the discharge or reduction of debt, and the possible liability of the creditor to account for VAT in such a case, where it and the debtor are 'connected persons' in relation to one another.

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