As part of his 2013 Budget proposals, Minister Gordhan announced various changes to the tax treatment of interest.
Firstly, as announced last year, the tax treatment of so-called ‘hybrid debt’ will be amended so as to re-characterise such debt as dividends. The main concerns in this area appear to be debt instruments that do not have a realistic possibility of being repaid in 30 years, or debt that is convertible into shares at the option of the issuer. Banks and insurers will be excluded from this re-characterisation treatment.
Secondly, certain restrictions will apply to connected person debt. ‘Excessive’ debt issued to connected person creditors will come in for unfavourable tax treatment in the form of limits that will be imposed on the deductibility of interest on such debt. The limit announced was 40 per cent of earnings after interest on other debts had been deducted. Excess interest will be allowed to be rolled forward for up to five years. The announcement referred specifically to situations where the creditor is exempt from tax on the interest (presumably referring to situations where the creditor is a non-resident). Hopefully the proposal, which would otherwise have wide-ranging implications for the economy, will be limited to such circumstances only.
Thirdly, there appear to be on-going concerns around the use of debt to finance corporate restructuring transactions. The proposals in this regard are somewhat sketchy but it appears that a regime whereby a ceiling will be placed on the deductibility of the interest under such circumstances will replace the current discretionary regime whereby taxpayers apply for a discretionary directive from SARS before being allowed to deduct the interest.