With effect from 1 January 2013, new rules were introduced
in the Income Tax Act No. 58 of 1962 ('the Act') governing
the tax consequences flowing from the reduction or waiver of debts.
According to the Explanatory Memorandum, the amendments were
prompted in response to the global financial crisis and the
unusually large number of companies facing financial distress. The
intention was therefore to establish a mechanism which facilitated
debt reductions without creating an additional obligation to pay
further tax.
In terms of the amended provisions, it is important to identify
the purpose for which the funds were borrowed. The reason for this
is that if the debt was used to fund deductible expenditure
or an allowance, the debt reduction or
discharge will be taken into account in terms of the
ordinary revenue rules. The rules for capital
gains apply as a residual category. Once the
purpose of the debt is
identified, then the relevant ordering
rules will apply in
