ARTICLE · 27 SEPTEMBER 2013

Tax Implications Of Debt Instruments With Equity Features

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The 2013 draft Taxation Laws Amendment Bill was issued by National Treasury for public comment on 4 July 2013

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The 2013 draft Taxation Laws Amendment Bill ("DTLAB") was issued by National Treasury for public comment on 4 July 2013. In accordance with the Explanatory Memorandum to the DTLAB, the tax legislation currently contains an anti-avoidance rule that deals with debt instruments that have equity features ("hybrid debt instruments"). The anti-avoidance rule denies a deduction in respect of any amount paid or payable in terms of a hybrid debt instrument. However, the hybrid debt instrument remains a debt instrument for all other purposes of the Income Tax Act 58 of 1962 (the "Act").

The current anti-avoidance rules apply generally when a hybrid debt instrument is convertible into an equity instrument within a period of three years from the date of issue of that debt instrument. National Treasury have indicated that the deficiencies in the current legislation are:

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