Browsing by Author "Janse van Rensburg, Pieter Johan"

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    Debt capitalisation: investigating the term ‘reduction amount’ in the Income Tax Act 58 of 1962
    (Stellenbosch : Stellenbosch University, 2017-12) Janse van Rensburg, Pieter Johan; Nel, Rudie; Stellenbosch University. Faculty of Economic and Management Sciences. School of Accountancy.
    ENGLISH SUMMARY : The capitalisation of debt in exchange for the issuance of shares is a common occurrence, not only in South Africa, but also internationally. Generally, there are three methods through which debts are capitalised, being the direct issue of shares (with or without cash flow), capitalisation through set-off and the conversion of debt instruments into shares. Since the introduction of section 19 of the Income Tax Act 58 of 1962 (‘the Act’) and paragraph 12A to the Eighth Schedule of the Act on 1 January 2013, there has been uncertainty whether any of the methods of debt capitalisation would result in a ‘reduction amount’ in terms of which the debt reduction regime applies. The number of taxpayers that have approached the South African Revenue Service (‘SARS’) to issue Binding Private Rulings (‘BPRs’) on the various methods of debt capitalisation highlights the uncertainty. The study addresses these uncertainties through a critical analysis of the terms ‘amount applied’ and ‘consideration’. Each of the methods of capitalisation are separately evaluated in terms of these definitions, as well as considering issues that are specifically related to the respective methods of capitalisation. Furthermore, the study analyses BPRs on debt capitalisation that have been issued by the SARS to determine if current practices of debt capitalisation support the analysis in terms of income tax legislation. Uncertainties from recent proposed tax legislative amendments dealing with debt capitalisation are also discussed. The conclusion is reached that all of the methods of capitalisation considered constitute an ‘amount applied’ as ‘consideration’ towards the reduction of debt as contemplated in section 19 of the Act and paragraph 12A to the Eighth Schedule of the Act. To the extent that the market value of shares issued equals the face value of the capitalised debt, no ‘reduction amount’ arises. The study shows that this conclusion can be aligned with the limited precedent in case law on debt capitalisation. A significant finding is that for set-off as a method of debt capitalisation, value mismatches between subscription loans and the market value of shares issued could attract adverse tax consequences in terms of section 24BA if shares have been issued at a discount or a premium to the value of the subscription loan. Based on the research findings it is suggested that if the factual circumstances do not provide for an exclusion from the application of section 24BA, set-off could be regarded as a less favourable method of debt capitalisation.