Sanchia Temkin
17 October 2008
Johannesburg — A BUSINESS rescue plan contained in SA's new Companies Bill for insolvent and about to be insolvent companies is likely to be defeated in light of the possible income tax and capital gains tax exposures the companies may face.
"There seems little purpose in creating a legislative regime which facilitates debt forgiveness by creditors, and then coupling that with a tax regime that imposes additional taxes on the distressed company," said Wouter Scholtz, a director of Mazars Moores Rowland yesterday.
He said it was absurd to encourage creditors of distressed companies to forgive debts, in the apparent expectation they would advance yet further funds or forgive even more debt, in order that the distressed company might meet the tax liabilities occasioned by the rescue package.
Given the escalation in the rate of business failures and the number of distressed companies, there was clearly a case for urgent reform of the income tax laws, he said.
The business rescue provisions in the Companies Bill are aimed at companies that are distressed to the point where they are either insolvent or likely to become so within six months. They allow the adoption of a business rescue plan executed by a supervisor with a view to restoring the company to profitability.
The bill sets out in detail what is to be addressed in a business rescue plan. One of the issues is the extent to which a company should be released from paying its debts.
Shareholders and directors can appoint a supervisor and start the process if the company is "financially distressed" -- a new test which is set out in the legislation's provisions. The appointed supervisor must be qualified under the provisions of the law.
At the same time, the Income Tax Act has wide-ranging measures to ensure the forgiveness of a debt, originally incurred to fund tax-deductible expenditure, will register as a taxable "recoupment" of that expenditure.
The act's provisions may also give rise to a taxable recoupment of capital allowances, claimed in respect of the depreciation of assets, such as plant and equipment, Scholtz said.
The act also makes provision for capital gains tax exposures for those debtors who are not caught by the income tax recoupment provisions.
There were exceptions to these capital gains tax liabilities b ut these catered only for cases where both the creditor and the debtor were companies, and dealt mainly with the forgiveness of debt between companies in the same group, he said.
"The tax regime offers no relief where debt is forgiven by individual shareholders in the debtor company."
Scholtz said what wa s needed wa s a broader exemption from tax liabilities arising from the forgiveness of debts that catered for all debts owed by companies that were either insolvent or faced imminent insolvency.
"To attach tax liabilities to a forgiveness of debt in such circumstances is not in anyone's interests." Even for the taxman it would generally be better if the distressed company was allowed to survive, so that it continued to be a source of revenue, said Scholtz.
The Companies Bill is expected to be passed into law in 2010.
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