The South African Business Rescue, restructuring (turnaround) and Liquidation profession is strictly regulated by legislation. Where does tax fit in?

Vincent Manko, Director in the Dispute Resolution practice, Jerome Brink, Director, and Varusha Moodaley, Senior Associate in the Tax & Exchange Control practice joined Jonathan Faurie on the Turnaround Talk on the Front Desk podcast to discuss 'The South African Business Rescue, restructuring (turnaround) and Liquidation profession is strictly regulated by legislation. Where does tax fit in?'

18 Dec 2024 23:12 Minutes Video

Jerome explains that tax plays a crucial role in business rescue or liquidation. Compromising or writing off a debt under the Income Tax Act triggers specific tax consequences. These provisions are technical, intricate, and apply even in business rescue scenarios. For instance, when a trade debt is compromised, there may be a recoupment, meaning previously deducted expenses could be added back to taxable income. While many companies in business rescue have assessed losses that limit immediate cash tax impacts, recent changes to tax rules, such as restrictions on fully utilising assessed losses, may still influence outcomes.

Varusha highlights the VAT implications during business rescue, noting that VAT filing obligations remain in effect. VAT must also be accounted for on business assets sold as part of the rescue plan. One key consideration is the “VAT clawback,” where, in terms of section 22(3) of the VAT Act, vendors who have claimed input tax deductions on unpaid tax invoices and who then enter into business rescue within 12 months of having claimed such deductions, are required to account for deemed output tax on the unpaid consideration, effectively swapping the supplier's compromised debt for a new liability to SARS.

Vincent emphasises that SARS is a critical stakeholder in business rescue, with participative rights in court proceedings and meetings. Unlike in liquidation, where SARS is a legislated preferential creditor, there is no such preference in business rescue. This distinction often sparks debate over the ranking and timing of SARS's claims, depending on whether the debt arises before or after the business rescue process begins.

Watch the full podcast below.

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