Tax Deductibility of Loan Waiver Upon Employee Resignation

Tax Deductibility of Loan Waiver Upon Employee Resignation

• 12 March 2025
• Corporate Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2026.

Question:

Are termination payments made by an employer to an employee who has voluntarily resigned always deductible for income tax purposes? An employee voluntarily terminated their employment with the employer. Following this termination, the employee became obligated to repay a loan that had been provided by the employer. As the employee was unable to settle the remaining loan balance, the employer agreed to waive the outstanding amount and settle any associated tax liabilities related to the resulting fringe benefit (after grossing up). The terms of both the repayment and waiver were documented in the employee’s termination agreement. Is the employer eligible to claim a deduction for the amounts paid in relation to this termination?

Answer:

1. The Problem / Facts

Can an employer deduct amounts paid in relation to the waiver of an employee's loan and the associated tax liabilities as termination payments for income tax purposes under the Income Tax Act 58 of 1962?

2. Applicable Law

• Section 11(a): General Deduction Formula.
• Section 23(g): Prohibits the deduction of private or domestic expenses.
• Paragraph 2(h) of the Seventh Schedule: Taxable fringe benefits relating to loan waivers.
• Section 24J: Governs interest and loan agreements for tax purposes.

3. Application of the Law to the Facts

• Deductibility of Termination Payments

Section 11(a) allows deductions for expenditure and losses incurred “in the production of income”, provided they are not of a capital nature. Termination expenses related to the waiver of the loan and grossing up of the tax liability may qualify as deductible if the employer can demonstrate that these payments were directly linked to maintaining goodwill or ensuring operational efficiency (e.g., facilitating smooth employee exits to protect business interests). The inclusion of these terms in the termination agreement strengthens such claims.

However, if the payments are deemed personal or capital in nature in terms of Section 23(g), they may be disallowed. Capital expenses generally relate to creating or improving long-term assets rather than recurring business operations.

• Fringe Benefit Taxation on Loan Waiver

The waiver of the loan triggers a fringe benefit taxable under Paragraph 2(h) of the Seventh Schedule. The employer is liable to withhold and remit tax on the fringe benefit’s value to SARS. Settling the tax obligation on behalf of the employee may also be considered a business expense if it serves an operational purpose.

• Overall Deductibility

The deductibility depends on the purpose and nature of the employer’s decision to waive the loan and settle the related taxes. If the waiver was made for operational reasons, such as employee relations or reputation management, it could be deductible under Section 11(a). However, if the expense is deemed capital in nature or personal (e.g., forgiveness as a gratuitous act), it will not qualify as a deduction under Section 23(g).

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