Now you can, now you cannot and ultimately you can. Following on a previous article in the newsletter, the next and hopeful final episode in the loan account saga turns out to be good news.  The latest news is that following some years of uncertainty and tax gymnastics with loan accounts, the legislature ultimately brought some clarity and good news since the 1st of January 2013 in respect of the donating or bequeathing of loan accounts.

Since the introduction of Capital Gains tax in October 2001 and more in particular paragraph 12(5) of the 8th Schedule of the Income Tax Act, an unnecessary amount of uncertainty existed and a good deal of foot work developed, consequently followed by divergent court judgments, in respect of the disposal of loan accounts to relatives and/or family trust by estate owners.  In the previous article in newsletter (7 of 2013) some examples of how to deal with loan accounts were discussed.  In the Taxation Laws Amendment Bill, 2012 published on 5th July 2012 a new paragraph 12A was introduced in the 8th Schedule which deals with the reduction or cancellation of debt.  This became law in the Taxation Laws Amendment Act 22 of 2012 published on 1st February 2013. 

The new amendments are explained in the explanatory memorandum on the Taxation Laws Amendment Bill as follows "firstly, if the debt reduction or cancellation qualifies as a donation under the donations tax, the donations tax potentially applies (as opposed to the income tax).  If the debt reduction or cancellation constitutes property of an estate and that debt reduction or cancellation is reduced or cancelled in favour of an heir or legatee by virtue of bequests, the estate duty potentially applies.  If the debt reduction or cancellation falls outside of all of the above paradigms (i.e.) is not a donation, a bequest or a taxable employer/employee  fringe benefit …), the debt reduction or cancellation will be taken into account in terms of the capital gain rules.”

In summary therefore, the bequest from a deceased estate to an heir of a debt which is owed to the estate by the heir as well as the donation to a debtor of a debt that is owed to the donor by the debtor will be CGT free.  Remember however that normal estate duty and donations tax rules will still apply.