Differences in wording between the recently enacted section 19 of the Income Tax Act (‘the Act’) and paragraph 12A of the Eighth Schedule to the Act and the previous plethora of provisions that dealt with debt reduction, will result in a choice having to be made by taxpayers that are looking to write off or reduce debts as to whether they will do so in terms of the recently enacted provisions or the previous provisions. The new provisions come into effect in respect of years of assessment commencing on or after 1 January 2013. Therefore a taxpayer with a tax year end of 31 July, for instance, can either write off the debt in its current tax year ending 31 July 2013 or during the following tax year ending 31 July 2014.

 

There are a number of interesting differences between in wording of the new and old provisions.

 

 For example, while the new provisions explicitly apply to debt that has financed tax deductions or allowances whether directly or indirectly, the wording of section 8(4)(m) and paragraph 20(3) of the Eighth Schedule imply that only debts that directly financed deductions or allowances were affected by these old provisions. 

 

Further, the capital gains tax provision (section 12A) under the new rules does not trigger a taxable capital gain, unlike the equivalent provision under the old rules (paragraph 12(5) of the Eighth Schedule). The write off of tax debt is also not taxed in terms of the new rules, unlike the old. There are also however a number of instances where the wording of the new provisions is unclear.

 

If your company has a tax year that is yet to end in calendar 2013 and you are contemplating writing off debt, you are urged to contact one of the BDO Tax Directors below to discuss the issues involved in more detail.