A company has a loan (asset) with a connected trust on which interest was charged. The company is considering writing off this loan account. Neither of the entities are being de-registered or liquidated. Can the company write-off this loan? Will the above trigger donations tax?
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
Paragraph 12A(6) of the Eighth Schedule to the Income Tax Act will not apply, because the company is not the debtor. The company will suffer a capital loss that will be disregarded in terms of paragraph 56(1). You need to enquire why the company is waiving the debt. If it’s in terms of a donation agreed by the company as a donation, donations tax applies and therefore no application of paragraph 12A. But paragraph 56 will apply to the company, because a donation is a disposal. If it’s because the trust can’t afford to pay, or because the company is to be deregistered, then it’s not a donation. And remember, paragraph 12A(6) hardly applies here because most of the provisions are where the company is the debtor. In the present matter the company is the creditor.