A close corporation (CC) has stopped trading. It has sold its equipment on loan account and is receiving monthly settlement payments. The payments to date have settled the members' loans. As money continues to flow the members now take the free cash as th
Author: Peter Surtees
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
I don’t know why the shareholders are considering this action.
Waiving the debt will result in a capital gain for the shareholders, being a debt benefit as defined in paragraph12A(1) of the Eighth Schedule to the Income Tax Act. They will pay CGT on this benefit.
The company will not be able to claim the loss, because the parties are connected persons in relation to each other.
This is in terms of paragraph 39 of the Eighth Schedule, which provides that where a capital loss arises in respect of a disposal between connected persons, the loss is clogged and may only be used against gains from disposals between the same two persons and then only if they are still connected to each other at that time. So there is the tax problem: a gain in the hands of the shareholders but an unusable loss for the company. I would advise the shareholders to reconsider their policy.