Most businesses in Zimbabwe are saddled with debts emanating from supply of goods, services and money. In order to lessen the debt burden, some may work out a debt settlement arrangement with their creditors or lenders, such that any portion of the debt reduced by the settlement is considered discharged or forgiven without the debtor having to offer anything in return, or offering something less in value than the debt outstanding. When that happens, the debtor cannot just go off the hook and enjoy the relief in peace without the taxman following him/her especially where the debtor previously enjoyed an income tax deduction of the amount being now waived or written off. There are income tax implications to content with. This article therefore seeks to examine and analyze the income tax consequences arising from the concession granted by, or compromise or arrangement made with a creditor, with the effect of writing off the debts or waiving the right a creditor may have on the taxpayer.
Accounting for Concessions
The Zimbabwe tax legislation makes provisions specifically for the accounting of concessions for income tax purposes. It brings to tax the amount or value of any benefit received by or advanced to a taxpayer as a result of any concession, compromise or arrangement given by or made with a creditor. Such concessions may include discounts, refunds, rebates, write offs or waivers from a creditor. A condition which will have to be satisfied before such an amount is brought to tax is that it should have been claimed as a deduction for income tax purposes either in the current or prior years. In ITC 1634 (1997) 60 SATC 235 (T) it was held that when amounts are reduced or liabilities are extinguished in the course of carrying on business there is a deemed benefit constituting gross income. This is so because, when the expenditure was accounted for in the first place, it would have reduced the taxable income. Therefore it implies that if a taxpayer‘s liability has been reduced due to a concession or arrangement by a creditor, the waived amount of the liability should be added back to the gross income and included to the taxpayer’s gross income and taxed accordingly. The same position is obtaining in South Africa. Its tax legislation defines it as any arrangement in terms of which any term or condition in respect of a debt is changed or waived or any obligation is traded, whether by means of substituting a new contract in place of an old one. Otherwise, for the obligation in terms of which that debt is owed or a debt owed by a company is settled, directly or indirectly by being converted to or exchanged for shares in that company, or applying the proceeds from shares issued by that company. In South African courts, it was held that when amounts are reduced or liabilities are extinguished in the course of carrying on business there is a deemed benefit constituting gross income. This is so because, when the expenditure was accounted for in the first place, it would have reduced the taxable income
Concessions not limited to revenue expenditure
In instances where a concession is granted for assets ranking for capital allowances, the same principle applies hence the taxable benefit shall be the aforesaid allowances. On that same note, a taxpayer who buys an asset on which he then claims capital allowances on, derives a taxable benefit on those capital allowances should the loan which was used to acquire or construct the asset be subsequently written off by the creditor. The same applies in an instance where a debtor’s loan which was used to finance raw materials or deductible expenses is forgiven by the creditor. South African tax legislation holds the same position as the Zimbabwean tax legislation when dealing with concessions for income tax purposes. Basing on the decision made in the Commissioner for Inland Revenue v Datakor Engineering (Proprietary) Limited, 60 SATC 503 case, it can be drawn that a benefit would also arise upon the conversion of interest bearing debt into share capital. There is therefore the need to include such a benefit in the gross income of the taxpayer so that it will be taxed accordingly.
It should however be noted that in Zimbabwe gross income does not include a concession which arises as a result of involuntary winding up of a company by the court because of its inability to pay debts, a taxpayer being declared insolvent or assigned his property or estate for the benefit of creditors or the estate of the taxpayer having been vested in the Corporation. It implies therefore that a concession or benefit from a creditor arising when a company is voluntarily wound up, dissolved by reason of expiration of period or dissolved by reason of a reduction of the number of members below or upon occurrence of event, constitute gross income of the taxpayer.
Failure to add back the waived or extinguished expenditure will then result in under declared income thus this may attract penalties and interest for it will be deemed as tax evasion. The taxpayer is then obliged to add back the expenditure to his or her gross income so that the correct picture of the taxable income can be painted.
It can be concluded that both Zimbabwe and South Africa bring the concessions into gross income of taxpayers. Therefore in order for taxpayers to avoid crossing paths with the tax authority, there is need for them to account for every form of benefit that may arise as a result of waiver or extinguishing of expenditure that has once been claimed for income tax purposes. Failure to correct the situation by adding back the expenditure to the gross income can prove to be costly for the taxpayer since it is viewed as tax evasion which can attract penalties and interest, and above all prosecution. Taxpayers should therefore be cognizant of the tax status of the transactions they enter into lest they get caught unawares by the taxman.