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Sars Loan Agreement

As I have already indicated, investing in companies with minimal social capital and large shareholder credits is probably a legacy of the past, when loans were useful mechanisms for shareholders to collect tax-free profits without paying taxable dividends and their capital without the complex social rules that previously applied to the reduction of social capital. , such as obtaining a court decision or approving all creditors Just withdraw. At present, it is no more difficult to reduce capital than to pay an ordinary annual dividend, and the two objectives, namely the withdrawal of cash from profits not generated by taxable dividends or capital reductions, can be achieved in this way. The only remaining benefit of a loan over the share capital is that the shareholder, as a creditor, competes with other creditors of the company in the event of insolvency, whereas this is not the case as a shareholder. However, in practice, it is likely that the shareholder subordinated or returned the loan when he has difficulty subordinating the loan and, in this case, that benefit has also diminished. One mechanism that taxpayers can use to manage cash flow could be to negotiate (re) defer payments and enter into subordination agreements on outstanding loan contracts. These agreements can help taxpayers reduce their cash flow and, as a general rule, include the obligation for the creditor of a debtor in difficulty to refrain from paying until a future event (or business of the same nature) occurs. However, from the SARS perspective, it is the fact that these rules may have characteristics of hybrid instruments, i.e. liabilities with capital characteristics. As a result, the provisions of the Income Tax Act can be triggered to combat tax evasion, which are intended to deny the effects of hybrid debt. D recorded the debts amortized in the form of additional income and declared this amount as part of his taxable income.

SARS agreed that this was a proper tax treatment of the amount in D`s books. However, the taxpayer recorded the depreciated amount as a loan between himself and D. When the insured claimed this loss as a deduction, SARS considered that the loss was in the hands of the insured and was not likely to be income, since D`s net debt is recorded by the taxpayer as a loan by the taxpayer. There are three types of HDIs and one of three types applies when the taxpayer`s obligation to pay an amount within the meaning of a subordination agreement has been deferred and the deferral is a function of the market value of the taxpayer`s assets that goes beyond his debts.