n Business Tax and Company Law Quarterly - The debt-waiver rules and their exemptions

Volume 5, Issue 4
  • ISSN : 2219-1585


Section 19 and paragraph 12A of the Act were introduced from 1 January 2013 to clarify the tax implications arising upon the waiver or reduction of a debt. These provisions contain various exemptions specifying the instances where the debt-waiver provisions will not apply. This article summarises the debt-waiver provisions contained in the Act in the context of the exemptions provided, and explores the purpose and efficacy of certain exemptions which may typically find application in a corporate environment. Three exemptions are focused on for purposes of this article, namely the group-of-companies exemption, the donations-tax exemption and the liquidation/deregistration exemption.

The debt-waiver provisions will either give rise to income tax implications (in the form of a reduction of cost of stock or recoupments) or CGT implications (in the form of a reduction of tax base cost or assessed capital losses carried forward), depending on the purpose for which the loan was used.
The group-of-companies exemption is only provided for in paragraph 12A, and exempts the debtor from a reduction of tax base cost or assessed capital losses, where a debt is waived by a creditor who forms part of the same group of companies as the debtor. The nuance arising when this exemption is applied in the context of an allowance asset (on which tax capital allowances have historically been claimed), is how this provision interacts with the recoupment provision contained in section 19(6) of the Act. It is submitted that the utilisation of the group-of-companies exemption where debt was used to fund allowance assets may give rise to more substantial recoupments in the debtors' hands than would otherwise be the case if this exemption was not applied.
With regard to the donations-tax exemption, it is submitted that it is unlikely that this exemption will apply in most corporate debt-waiver scenarios. This is because a debt waiver is unlikely to be motivated by some form of gratuitous intent on the part of the creditor. In the context of the application of the deemed donation, provisions to a debt waiver undertaken in a corporate environment, given the extraordinarily wide ambit of the provisions, it is submitted that the provision must be read in the context of Part V of the Act, with the result that some form of intention to donate must be present from the creditor's perspective, with the result that the application of these provisions in a corporate debt-waiver context may be limited. In addition, these provisions should be considered in light of all facts and circumstances applicable to the debtor, for example, where the debtor is factually incapable of repaying the debt, a question arises as to whether some form of 'adequate consideration' has, in fact, been provided, resulting in the non-application of the deemed donation provisions.
Finally, the liquidation/deregistration exemption is discussed. This provision only applies in the context of paragraph 12A of the Act, and makes sound commercial sense, as companies which are in substantial financial distress or terminating their corporate existence may rely on this exemption for relief. It is submitted that this exemption should be extended to section 19 of the Act, which would be a welcome step forward in achieving the overall purpose of the debt-waiver provisions, as discussed below.

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