(2)    Subject to subparagraph (6), this paragraph applies where-

 

(a)     a debt benefit in respect of a debt owed by a person arises in respect of a year of assessment by reason or as a result of a concession or compromise in respect of that debt during that year of assessment; and

[Item (a) substituted by section 77 of Act 23 of 2018 effective on 1 January 2018, applies in respect of years of assessment commencing on or after that date]

 

(b)     the amount of that debt is owed by that person in respect of, or was used by that person to fund, directly or indirectly, any expenditure, other than expenditure in respect of trading stock in respect of which a deduction or allowance was granted in terms of this Act.

[Item (b) substituted by section 77(1)(e) of Act 23 of 2018, by section 47 of Act 23 of 2020 and by section 44(1)(b) of Act 20 of 2021]

 

(3)     Where-

 

(a)     a debt benefit arises in respect of a debt owed by a person as contemplated in subparagraph (2); and

 

(b)     the amount of that debt is owed in respect of or was used as contemplated in item (b) of that subparagraph to fund expenditure incurred in respect of an asset that was not disposed of by that person in a year of assessment prior to that in which that debt benefit arises,

[Item (b) substituted by section 77 of Act 23 of 2018 effective on 1 January 2018, applies in respect of years of assessment commencing on or after that date]

 

the amount of expenditure so incurred in respect of that asset must, for the purposes of paragraph 20, be reduced by the debt benefit in respect of that debt.

 

(4)     Where-

 

(a)     a debt benefit arises in respect of a debt owed by a person as contemplated in subparagraph (2); and

 

(b)     the amount of that debt is owed in respect of or was used as contemplated in item (b) of that subparagraph to fund expenditure incurred in respect of an asset that was disposed of in a year of assessment prior to that in which that debt benefit arises, that person must if the amount determined in respect of that disposal as-

 

(i)      a capital gain; or

 

(ii)     a capital loss,

 

differs from the amount that would have been determined, whether as a capital gain or as a capital loss, in respect of that disposal had that debt benefit been taken into account in the year of the disposal of that asset, treat that absolute difference as a capital gain to be taken into account in respect of the year of assessment in which the debt benefit arises: Provided that in taking that debt benefit into account in respect of the year of disposal of that asset that person must take into account the extent to which the expenditure in respect of that asset has been reduced by any other debt benefit taken into account, in terms of this subparagraph, in respect of that disposal.

[Item (b) and the words following item (b) substituted by section 77 of Act 23 of 2018 effective on 1 January 2019, applies in respect of years of assessment commencing on or after that date]

 

(5)     Where subparagraph (3) or (4) applies in respect of a debt that was used to fund expenditure in respect of a pre-valuation date asset of a person, for the purposes of determining the date of acquisition of that asset and the expenditure incurred in respect of that asset, that person must be treated as having-

 

(a)     disposed of that asset at a time immediately before that debt benefit arose as contemplated in subparagraph (3)(a) or (4)(a), as the case may be, for an amount equal to the market value of that asset at that time; and

 

(b)     immediately reacquired that asset at that time at an expenditure equal to that market value-

 

(i)      less any capital gain, and

 

(ii)     increased by any capital loss,

 

that would have been determined had the asset been disposed of at market value at that time, which expenditure must be treated as an amount of expenditure actually incurred at that time for the  purposes of paragraph 20(1)(a).

 

(6)     This paragraph must not apply to a debt benefit in respect of any debt owed by a person-

 

(a)     that is an heir or legatee of a deceased estate, to the extent that-

 

(i)      the debt is owed to that deceased estate;

 

(ii)     the debt is reduced by the deceased estate; and

 

(iii)    the amount by which the debt is reduced by the deceased estate forms part of the property of the deceased estate for the purposes of the Estate Duty Act;

 

(b)     to the extent that the debt is reduced by way of-

 

(i)      donation as defined in section 55(1); or

 

(ii)     any transaction to which section 58 applies,

 

in respect of which donations tax is payable;

[Item (b) substituted by section 77 of Act 23 of 2018 effective on 1 January 2019, applies in respect of years of assessment commencing on or after that date]

 

(c)     to an employer of that person, to the extent that the debt is reduced in the circumstances contemplated in paragraph 2(h) of the Seventh Schedule;

 

(d)     to another person where the person that owes that debt is a company, if-

 

(i)      that company owes that debt to a company that forms part of the same group of companies as that company; and

 

(ii)     that company has not carried on any trade,

 

during the year of assessment during which that debt benefit arises and the immediately preceding year of assessment: Provided that this subitem must not apply in respect of any debt-

 

(aa)   incurred, directly or indirectly by that company to fund expenditure incurred in respect of any asset that is disposed of by that company, before or after that debt benefit arises, by way of an asset-for-share, intra-group or amalgamation transaction or a liquidation distribution in respect of which the provisions of section 42, 44, 45 or 47, as the case may be, applied; or

[Paragraph (aa) substituted by section 41(1)(a) of Act 17 of 2023 with effect from 1 January, 2024 and applicable in respect of any disposal of an asset on or after that date]

 

(bb)   incurred or assumed by that company in order to settle, take over, refinance or renew, directly or indirectly, any debt incurred by-

 

(A)    any other company that forms part of the same group of companies; or

 

(B)    any company that is a controlled foreign company in relation to any company that forms part of the same group of companies;

 

Provided further that, for purposes of this paragraph, where a debt benefit arises prior to the disposal of an asset, that debt benefit must be treated as a debt benefit that arose immediately before that disposal;

[Subparagraph (d) amended by section 41(1)(b) of Act 17 of 2023 with effect from 1 January, 2024 and applicable in respect of any disposal of an asset on or after that date]

 

(e)     that is a company, where-

 

(i)      that debt is reduced in the course, or in anticipation, of the liquidation, winding up, deregistration or final termination of the existence of that company; and

 

(ii)     the person to whom the debt is owed is a connected person in relation to that company,

 

to the extent that debt benefit in respect of that debt does not, at the time that the debt benefit arises, exceed the amount of expenditure contemplated in paragraph 20 incurred in respect of that debt by the connected person: Provided that this subitem must not apply-

 

(a)     if-

 

(i)      the debt was reduced as part of any transaction, operation or scheme entered into to avoid any tax imposed by this Act; and

 

(ii)     that company became a connected person in relation to the person to whom the debt is owed after the debt (or any debt issued in substitution of that debt) arose; or

 

(b)     if that company-

 

(i)      has not, within 36 months of the date on which the debt is reduced or such further period as the Commissioner may allow, taken the steps contemplated in section 41(4) to liquidate, wind up, deregister or finally terminate its existence;

 

(ii)     has at any stage withdrawn any step taken to liquidate, wind up, deregister or finally terminate its corporate existence; or

 

(iii)    does anything to invalidate any step contemplated in subparagraph (i), with the result that the company is or will not be liquidated, wound up, deregistered or finally terminate its existence;

[Item (e) amended by section 77(1)(i) of Act 23 of 2018 deemed effective on 1 January, 2018 and applicable in respect of years of assessment commencing on or after that date. Subparagraph (iii) substituted by section 44(1)(c) of Act 20 of 2021]

 

(f)     to another person where the person that owes that debt is a company that-

 

(i)      owes that debt to a company that forms part of the same group of companies as that company; and

 

(ii)     reduces or settles that debt, directly or indirectly, by means of shares issued by that company:

 

Provided that this subitem must not apply in respect of any debt that was incurred or assumed by that company in order to settle, take over, refinance or renew, directly or indirectly, any debt incurred by another company which-

 

(aa)   did not form part of that same group of companies at the time that that other company incurred that debt; or

 

(bb)   does not form part of that same group of companies at the time that company reduces or settles that debt, directly or indirectly, by means of shares issued by that company; or

[Item (f) amended by section 77(1)(i) of Act 23 of 2018 deemed effective on 1 January, 2018 and applicable in respect of years of assessment commencing on or after that date]

 

(g)     to the extent that the debt so owed-

 

(i)      is settled by means of an arrangement described in paragraph (b) of the definition of ‘concession or compromise’; and

 

(ii)     does not consist of or represent an amount owed by that person in respect of any interest as defined in section 24J incurred by that person during any year of assessment.

[Sub-item (ii) substituted by section 44(1)(d) of Act 20 of 2021 effective on 1 January, 2022 and applicable in respect of years of assessment commencing on or after that date]

[Item (g) inserted by section 77 of Act 23 of 2018 effective on 1 January 2018, applies in respect of years of assessment commencing on or after that date]

 

(7)     Any tax which becomes payable as a result of the application of paragraph (b) of the proviso to subparagraph (6)(e) must be recovered from the company and the connected person contemplated in that subparagraph who must be jointly and severally liable for that tax.

[Paragraph 12A inserted by section 108 of Act 22 of 2012, amended by section 127 of Act 31 of 2013, section 82 of Act 43 of 2014, section 106 of Act 25 of 2015 and substituted by section 70 of Act 17 of 2017 effective on 1 January 2018 and applies in respect of years of assessment commencing on or after that date]