Debt Forgiveness & CGT

Debt Forgiveness & CGT

• 02 February 2013
• Individuals Tax
• SAIT Technical

Important:

This article is based on tax law for the tax year ending 28 February 2013.

By Michael Stein (Friday Page)

Executive summary

Michael Stein discusses that tax changes reating to debt forgiveness with effect from 1 January 2013. The current par 12(5) will be replaced with par 12A that will will provide, amongst other things, that a capital gain will arise for a debtor whose indebtedness is reduced or cancelled in certain circumstances. There will no longer be a capital gain for the debtor whose indebtedness ends when the debt constitutes property for estate duty purposes in the creditor's estate.

Full article

The notorious para 12(5) of the Eighth Schedule to the Income Tax Act deems a disposal of an asset to occur, subject to certain exceptions, when a debt owed by a person to a creditor has been reduced or discharged by the creditor for no consideration or for a consideration that is less than the amount by which the face value of the debt has been so reduced or discharged.

One example of the application of this provision is when a testator in his will forgives a debt owing by someone. For example, a father may in his will provide that an amount owing by his child will be waived on his (the father's) death. The debt owing by the child constitutes property in the father's estate for estate duty purposes and when it is forgiven as a bequest in the will it gives rise to a capital gain for the child under para 12(5).

Well, the position is set to change with effect from 1 January 2013 and in years of assessment commencing on or after that date. When the Taxation Laws Amendment Act 2012 is promulgated .and becomes law, para 12(5) will be scrapped and a new, virtually impenetrably drafted, provision will come into force, that is, para 12A of the Eighth Schedule (which must be read together with a new s 19 of the Act). Paragraph 12A will provide, amongst other things, that a capital gain will arise for a debtor whose indebtedness is reduced or cancelled in certain circumstances.

Paragraph 12A will be made inapplicable when the debt that is cancelled or reduced on the death of the creditor constitutes property in his or her estate for estate duty purposes. The result is that there will no longer be a capital gain for the debtor whose indebtedness ends when the debt constitutes property for estate duty purposes in the creditor's estate.

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