On 18 February 2015, the South African Revenue Service (SARS) launched Binding Private Ruling 187 (Ruling), which handled the waiver of a loan subsequent to the application of an intra-group transaction.
The truths were as follows:
- Company A held 74 % of the shares in Company B, and Business C held 26 % of the shares in Business B.
- In terms of a Black Economic Empowerment deal, Business A sold its business to Business B.
- The company that Company A sold to Company B was effectively a prospecting and mining business, making up different assets, consisting of allowance assets, property, debtors, agreements and goodwill.
- Business A had no unredeemed capital expenditure at the time of the sale. The purchase cost was to stay impressive on loan account, which loan account brought in interest.
- Section 45 of the Income Tax Act, No 58 of 1962 (Act) used to the transfer of the assets as Business A and Business B formed part of the exact same group of companies.
- Due to different factors affecting the mining market, Business B had had a hard time to pay back the capital and interest, and a portion of the overdue interest had actually been composedcrossed out by Company A as a bad financial obligationan uncollectable bill.
- It was recommended that Business A waive the entire loan owing by Company B.
Taking cognisance of the above, it was clear that the parties were concerned about the application of the debt decrease provisions consisted of in s19 of the Act and paragraph 12A of the Eighth Arrange to the Act. Usually, where there is a decrease of financial obligation that has actually been utilized to fund deductible expense or allowance possessions, a recoupment could occur in the hands of the debtor in regards to s19 of the Act. Similarly, where there is a decrease of financial obligation that has been made use of to money capital assets, it might lead to a decrease of base expense and/or a capital gain for the debtor in terms of paragraph 12A of the Eighth Schedule to the Act.
SARS ruled that paragraph 12A would not be relevantapply at all, presumably because of the group company exemption included in paragraph 12A(6)(d). However, there is no comparable group company exemption available in regards to s19 of the Act. Appropriately, SARS ruled that s19 of the Act would be suitable, however only to the degree that the loan associated to allowance assets, other than mining possessions in terms of which a reduction was asserted under s15(a) of the Act.
Section 19 would be applicableapply to the degree that the loan associated to mining assets in regard of which a reduction was declared under s15(a) of the Serve as checked out with s36 of the Act.
In other words, s19 would just applyput on non-mining allowance assets and not to mining assets. Sadly the Ruling does not elaborate on the reason for making the difference in between mining and non-mining allowance possessions.
SARS indicated that s19 will not result in recoupments for Company A in respect of any non-mining allowance possessions for which Business An asserted allowances and which were moved in regards to s45. SARS also ruled that s19 would useput on trading stock still on hand as well as trading stock that had actually been disposed of.
SARS even more suggested that the waiver of the loan would not make up # 39; gross incomegross earnings # 39; for Company B to the degree that it does not otherwise constitute a recoupment.
Additionally, and in terms of paragraph 56(1) of the Eighth Set up to the Act, any capital loss in the hands of Company A in regard of the waiver of the loan have to be disregarded to the extent that there are no recoupments or changes for Business B.
It is not clear from the Ruling whether s45(3A) of the Act used to the loan. If it did, Business A would have had a base expense of nil in regard of the loan since it was utilized to fund the intra-group deal, and Business A would not have actually been able to generate a capital loss.
Interestingly, SARS also indicated that paragraph 38 of the Eighth Arrange of the Act would not use, indicating that the waiver would neither make up a contribution, nor a disposal in between linked persons not at an arms length rate.