In line with current economic trends of there being a weaker economic climate, National Treasury recognises that some taxpayers are at risk of becoming insolvent and will seek to reduce or restructure their debt. In the budget proposals for 2011, National Treasury announced its intention to consider the elimination of unintended tax consequences of debt reductions in circumstances where there is a debt work-out.

Legislative amendments were subsequently proposed to amend the definition of "gross income". However, the proposals were withdrawn following comments received that there was no co-ordination with recoupment rules. It was accepted that the isolated amendment was not appropriate.

In the 2012 budget proposals, the issue of debt cancellation is highlighted as one of the tax amendments for the forthcoming year. It is indicated specifically that –

"The goal would be to create a simplified regime to determine the tax impact on the debtor when debt unilaterally reduced or cancel without full consideration, and to eliminate adverse tax consequences when the debt relief merely restores the debtor to solvency."

No specific indication is provided as to how this goal will be achieved, although it is noted in the 2012 budget proposals that specific rules will be required to regulate the situations where creditors agree to convert their debt interests into an equity stake as partial compensation. It remains unclear as to what form these rules will take as well as what other matters will be addressed in any legislative amendments required to eliminate the so-called unintended tax impact of debt reductions.

Written by Natalie Napier, Director, Tax, Cliffe Dekker Hofmeyr