Don’t suffer the tax consequences of waived debt

Many natural persons or trust shareholders in companies are confronted with the unintended tax consequences of owing an amount on a loan account to the company in which they hold those shares. These tax consequences specifically relate to the “deemed dividend” which arises on interest-free loans (related to so-called “debit loans” in companies). In many cases, there is no intention to ever repay the loan account, and shareholders and companies often consider simply waiving these loan accounts.

The issue typically arises when the shareholder is not immediately subject to any of the adverse debt waiver provisions of the Income Tax Act. The shareholder often opts to absorb any tax recoupments or base cost adjustments as a result of the debt benefit which it received as a result of the waiver. On face-value, in such a case, it is therefore often presumed that a debt waiver does not have any tax consequences.

However, when debts are waived, it is critical that not only the debt waiver provisions of the Income Tax Act are considered, but also the dividends tax provisions and the donations tax provisions.

Dividends Tax

The definition of a “dividend” for income tax purposes includes any amount which has been transferred or applied for the benefit of any person, in respect of the shares of that company. Although a debt waiver is unlikely to constitute an amount transferred in respect of shares, a strong argument can be made that a debt waiver would constitute an amount applied for the benefit of a shareholder.

The debt waiver is therefore likely to result in an amount applied, which constitutes a dividend for which dividends tax is payable by the natural person or trust shareholder. This is a dividend in respect of the entire amount of the loan, not only of the foregone interest that gave rise to the issue in the first place.

Donations Tax

The debt waiver regime provides for an exclusion from its adverse tax consequences to the extent that the donations tax provisions of the Income Tax Act apply. Importantly though, this is only true if the donations tax is actually payable. By including an exemption for the donations tax provisions, donations tax should be taken into account before considering debt waivers in isolation.

To the degree that the company did not receive “adequate consideration” for a loan waiver, it will be regarded as a donation to the shareholder. When a loan is waived and a company does not receive any consideration for the loan, the argument could be made that “adequate consideration” had not been received by the company.

Therefore, despite the debt waiver provisions not triggering any immediate adverse tax consequences for a natural person or trust shareholders, one must not lose sight of potential dividends tax and donations tax implications when waiving loan accounts. It is always recommended that appropriate advice is sought before merely waiving a loan.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE) 




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IC Marais

Professional experience:

IC Marais is a certified CA (SA) with public sector and private sector technical knowledge based on 5 years’ Public Sector accounting, auditing and financial management experience and 5 years audit, tax and accounting experience. Detailed knowledge of private and public sector accounting and auditing standards (GRAP, IPSAS, IFRS, IAS, ISA) and public sector financial legislation (MFMA, etc.)

He enjoys the outdoors, hunting and fishing.


Professional experience:

In 1995, Schalk started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and then Mazars Moores Rowland in 2007) in Bloemfontein. In 1998, Schalk was appointed as manager at Moores Rowland, where he became a partner in 2003. Schalk received his Postgraduate Certificate in Advanced Taxation in 2006 and in 2009 he received his Certificate in the Administration of Estates.


Professional experience:

Cedric started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and Mazars Moores Rowland in 2007), Bloemfontein, in 1986. After completion of his articles, he joined the Special Investigations Division of the Department of Finance (SA Revenue Services) as a senior inspector from 1990 to 1991.


Professional experience:

Lucha started her career as a tax inspector at the Inland Revenue Department of New Zealand. After this she worked in commerce in Canada, Mexico and the United States.

On her return to South Africa, she completed her CA training contract with us and has been with Newtons ever since. She became a Partner in 2012.

Apart from her CA(SA) qualification she also holds a postgraduate certificate in Advanced Taxation (2005) and has the overall responsibility for training as our Training Officer.