Episode 5 – Waiver of loans

02 August 2022

Video Transcription

Ladies and gentlemen, the waiver of loans is now becoming an issue with the tax authorities. Whenever companies are waiving loans, you have a creditor and a debtor. If the creditor waives the loan, especially when it comes to inter-company debts, the tax authorities are taking the position that under Section 34, you have a waiver of the loan and they ought to bring it to tax. 

I don’t think they’re interpreting that section correctly. What is important is if there is a loan in the first instance, there are two legs to this journey. The first leg is between the lender and the borrower. The second leg is what the borrower does with the money. He actually uses the money perhaps to use it to pay his suppliers, working capital purposes or buys a fixed asset and claims capital allowances. The only time when Section 34 and Section 30 Sub 4 should apply is when the lender releases a debt.

In the first instance, there must be a trading transaction or money has been lent on which he sells an asset and the user actually claims capital allowances. That’s the only time when Section 34 should be invoked. Unfortunately, what the tax authorities are doing mistakenly sometimes is when there is a loan and the person who borrows the money then uses the money for settling his working capital expenses, they tend to take the position that Section 34 should actually apply which is not correct. 

Because the first leg of the journey is related to the loan itself and it should be seen separately from the second leg of the transaction. That’s an important distinction that you have to actually communicate to the tax authorities. Otherwise, we are having problems with the tax authorities and misunderstanding the application of Section 34.

So bear in mind the tax authorities are now attacking that and the sums are quite large. I’ve had an instance where even a dividend has been used to offset a loan they’ve actually repaid and they’ve said that is actually a waiver. That’s incorrect. 

Ladies and gentlemen, waiver of loans is becoming an issue with the tax authorities. Thank you.

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