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[FAQ] Waiver of loan between connected persons
- 04 August 2021
- Capital Gains Tax
- The Tax Faculty Tax Specialist
This article is based on tax law for the year ending 28 February 2021.
Background
Two companies are connected persons. Both companies waived the loan account between them. This was a conditional waiver of a loan account.
Is it correct that due to the fact that they are connected parties, the capital loss arising from this will trigger a clogged loss? Please advise as to the treatment of the capital gain in the hands of the other party. Is this capital gain not affected by the clogged loss of the other leg of the transaction? Is there anything from a tax perspective that may prohibit a conditional waiver of loan?
Answer
The Income Tax Act
If the waiver is subject to a condition, there is no disposal until the condition is fulfilled.
Relevant tax law
Paragraph 13(1) of the Eighth Schedule to the Income Tax Act:
“The time of disposal of an asset by means of- (a) a change of ownership effected or to be effected from one person to another because of an event, act, forbearance or by the operation of law is in the case of- (i) an agreement subject to a suspensive condition, the date on which the condition is satisfied”.
When the waiver crystallises, the disposal will take place on that date.
Because there is a disposal, there is a gain for the debtor and a loss for the creditor. The gain is subject to CGT in terms of paragraph 3:
“A person’s capital gain for a year of assessment, in respect of the disposal of an asset- (a) during that year, is equal to the amount by which the proceeds received or accrued in respect of that disposal exceed the base cost of that asset”.
There is no condition for relief where the gain is from a disposal with a related or connected person.
Paragraph 39(1) provides that:
“A person must, when determining the aggregate capital gain or aggregate capital loss of that person, disregard any capital loss determined in respect of the disposal of an asset to any person- who was a connected person in relation to that person immediately before that disposal”.
Paragraph 39(2) provides that:
“A person’s capital loss which is disregarded in terms of subparagraph (1) may be deducted from that person’s capital gains determined in respect of disposals of assets during that year or subsequent years to the same person to whom the disposal giving rise to that capital loss was made, if at the time of those subsequent disposals, that person still a connected person in relation to that person”.
Therefore, the clog applies only in respect of the loss.
Webinar Commentary
Refer to the following webinar: Capital Gains Tax Series here.