What are the tax implications of Debt Restructuring?

In my previous article “Dealing with debt in your Business” I discussed 3 options for dealing with debt in your business. In this article we look at one of the tax implications that may result from restructuring debt.

Changing the terms and conditions of debts may have unintended tax implications. Tax payers that find themselves in financial distress should thus be aware of the consequences debt restructuring could result in.

One of these consequences is “Recoupment under Section 8(4)(a)”

If you sell an asset on which you have claimed wear & tear, the allowance is recouped under section 8(4)(a) to the extend that the proceeds of the sale exceed the part of the cost which has not been claimed as a deduction by the time of the sale.

To explain this mouth full in simpler terms I will use an example:

ABC PTY purchased a vehicle for R400,000 and claimed wear & tear of 20% per annum on the cost of the vehicle. Two years later the vehicle is sold for an amount of R343,000. Two full years of depreciation / wear & tear was claimed.

ABC PTY must include in its gross income:

Amount received on sale of vehicle ………………………………………………………..………….  R343,000

Less:      Cost of vehicle ………………………………………………………………  R400,000

Less:      Wear & tear for year 1 & 2 ……………………………………………    (R160,000)

Less:      Portion of cost not written off (known as tax value)   ………..  R240,000        (R240,000)

Section 8(4)(a) recoupment included in gross income ……………………………………….   R103,000

 

The above illustrates one of the many consequences of restructuring your debt and business affairs. When you find yourself in a position where you have to restructure your debt or your operations, ensure to enlist the services of professionals.

For more information on restructuring of your business debt please reach out to me on https://linktr.ee/nobleprosperity