Writing off debt, or better phrased, debt waiver is dealt with in Section 19 and paragraph 12A of the Eighth Schedule in the Income Tax Act 58 of 1962 (“ITA”). When debts are waived, written off or reduced, there are tax implications on the part of both Debtor and Creditor in many instances. For example, where a creditor waives a debt owed of R 100 and the debtor has not paid anything for the waiver, the tax implication in terms of capital gains tax or recoupment to income would be the full debt amount of R 100.
An interesting issue presents itself now, in the case of dormant companies which have ceased active operations but still have debt owed to other group companies. The Draft Taxation Laws Amendment Bill (“DTLAB”) proposes new requirements in Section 19 and paragraph 12A(6)(d), which would apply to debt reductions or waivers owed by dormant companies where the debtor and creditor companies are in the same group of companies.
The dormant company could also need to pay tax or receive refunds from SARS. A tax amount outstanding may be subject to a dispute. A refund may be subject to an audit. Refunds can only be paid to the debtor company’s bank account, which would mean that the waiver of debt can only take place three years after the refund is received from SARS.