Section 19 / Para 12A rules relating to the waiver of debt. Carmen Gers

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1 Section 19 / Para 12A rules relating to the waiver of debt Carmen Gers

2 DTLAB Debt relief rules overhauled in 2017 Moved from reduction amount to debt benefit / concession or compromise A number of concerns regarding practical application resulted in further changes proposed per the DTLAB

3 effective date The following changes are deemed to: come into operation on 1 January 2018; and apply in respect of years of assessment commencing on or after that date (i.e. retrospective application).

4 application Where a debt benefit arises iro debt owed by a person as a result of / by reason of a concession or compromise Application of debt determines if section 19 / para 12A 3 relevant terms (current & DTLAB) debt defined as any amount owed by a person, but excludes: Tax debt; and An amount of interest.

5 change / waiver of term or condition Concession or compromise Debt benefit Existing Draft TLAB Existing Draft TLAB Term or condition applying iro debt is changed / waived [ term includes name of debtor, currency in which loan denominated or loan is subordinated] EM: Inclusion of any changes in the terms or conditions of a debt as a concession or compromise may have the unintended consequence of affecting legitimate transactions. Only realisation events to be included. A debt is cancelled, waived or remitted Debt is extinguished by - redemption of the claim iro that debt - merger by reason of acquisition of that claim iro that debt by the debtor or by a connected person iro the debtor The amount by which the face value of the claim iro that debt held by the creditor prior to entering into arrangement exceeds the market value of the claim iro that debt held or acquired by reason of or as a result of arrangement. [from perspective of creditor, not about how much debtor was impoverished to effect that compromise / concession] Remitted can include a repayment which is not intended In the case of merger must be the same person acquiring and connected person only relevant for redemptions ---- The amount of debt that is cancelled, waived or remitted The amount by which the face value of the claim iro that debt held by the creditor prior to entering into arrangement exceeds the expenditure incurred iro - The redemption of that debt - The acquisition of the claim iro that debt

6 debt substitution Existing An obligation is substituted, by novation or otherwise, for the original debt obligation [e.g. refinance in same company, or delegate debt and incur corresponding obligation] Concession or compromise Draft TLAB EM: inclusion of substitution of an obligation iro a debt adversely affects arrangements that do not result in any loss to the fiscus and should be removed. Such arrangements include instances where a bridge loan is replaced by permanent funding.

7 capitalisation of debt Concession or compromise Debt benefit Existing Draft TLAB Existing Draft TLAB Debt owed by company is settled, directly or indirectly, by Interest-bearing debt owed by company is settled, directly or indirectly, by - being converted to or exchanged for shares in that company - applying the proceeds from shares issued by that company. Amount by which face value of the claim iro that debt held by creditor prior to entering into arrangement exceeds the - market value of the shares acquired; or - increase in market value of the shares held due to the implementation of the arrangement. Amount by which the face value of the debt before arrangement exceeds the increase in the effective interest held by the creditor in the debtor *Amended definition as per Treasury response document Initial definition included new definitions of direct and indirect interest Definitions of direct interest, indirect interest, interest-bearing debt and market value inserted. Clarified in response document that only interest component which was deducted by debtor and never paid to creditor that will be impacted

8 effective date The following changes are deemed to: come into operation on 1 January 2019; and apply in respect of years of assessment commencing on or after that date.

9 recoupment and reduction Debt benefit arises Debt was applied to fund allowance asset disposed of in a prior year Then: if amount determined iro disposal (as capital gain / loss) differs from amount that would have been determined had debt benefit been taken into account in year of disposal treat difference as capital gain

10 donations tax exclusion Application of debt relief rules excluded where debt reduced by way of donation PLUS in respect of which donations tax is payable e.g. debt reduction in a group of companies, could be by way of donation but exclusion