Browsing by Author "Hardnick, Ryelan"

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    Debt conversion involving preference shares : investigating the application of section 7C of the South African Income Tax Act
    (Stellenbosch : Stellenbosch University, 2020-12) Hardnick, Ryelan; Nel, Rudie; Stellenbosch University. Faculty of Economic and Management Sciences. School of Accountancy.
    ENGLISH SUMMARY: Debt conversion is an arrangement in terms of which debt is converted into equity. Debt conversion is not limited to ordinary shares and could also involve preference shares. Section 7C of the Income Tax Act, No. 58 of 1962, as amended (hereafter referred to as ‘the Act’) requires the provision of a loan, an advance or credit before the section can be applied. Preference shares applied in debt conversion transactions could be used as a possible means of avoiding section 7C of the Act, as the conversion to equity would result in there no longer being a loan, an advance or credit. The objective of this research assignment was to investigate whether different types of preference shares issued in debt conversion transactions could be argued as similar to a loan, an advance or credit, and thus merit an argument in favour of the application of section 7C of the Act. The substance over form doctrine served as a basis for the study which investigated whether different preference shares (equity in nature) could be argued as constituting a loan, an advance or credit (debt in nature). The characteristics of the different types of preference shares were therefore compared to the characteristics of a loan, an advance and credit in order to argue which types of preference shares could be deemed similar to a loan, an advance and credit. As the words ‘loan’, ‘advance’ and ‘credit’ are undefined in the Act, the meaning of these words was investigated and applied in formulating the characteristics of a loan, an advance and credit. The characteristics of different types of preference shares (redeemable, cumulative and convertible) were then investigated and a comparison was drawn between the characteristics of the different types of preference shares and the characteristics of a loan, an advance and credit. Based on the comparison, it was found that redeemable and cumulative preference shares had the most characteristics in common with a loan, an advance and credit. Convertible preference shares were found to have the least characteristics in common with a loan, an advance and credit. Furthermore, only redeemable preference shares were also classified as hybrid equity instruments as contemplated in the Act. The overall conclusion of this study is a recommendation to include redeemable preference shares within the scope of section 7C of the Act. This recommendation would require consultation with various stakeholders before changes can be made to section 7C. Further consideration could also be given to insert definitions of a ‘loan’, an ‘advance’ and ‘credit’ in section 7C of the Act in order to aid interpretation and provide clarity on when section 7C will apply.