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Here's why debt forgiveness doesn't escape SARS' tax net

by , 11 September 2014
If you're in the business of giving clients credit, you may be familiar with the idea of debt forgiveness. This is when you forgive or reduce your client's debt because he can't pay.

This is something you won't normally do on large amounts of debt but you may be flippant about smalls amounts. But be warned, there are Capital Gains Tax (CGT) implications of this decision.

Read on to discover what they are so the tax net doesn't catch you out...

 

Here's what happens when you write off debt  and it results in results in a capital gain or loss

 
If you write off or reduce a debt, the debtor makes a capital gain and the creditor, a capital loss. So, if the debt has a face value of R150 and you write it off, you as the creditor make a capital loss and the debtor, a capital gain of R150. 
 
You calculate this as follows:
 
 
So what does this mean for CGT?
 
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Here's what this forgiven debt means when it comes to CGT

 
If you forgive a debt, you make a capital loss. You can't offset this loss, but you can claim it as a tax deduction from your income tax.
 
If you're on the other end of this and someone forgives your debt, you make a capital gain. You must pay CGT on the amount of money your creditor forgave. 
 
Don't think for a moment that SARS will be as forgiving as your creditor in this situation. You will have to pay the tax on that money.
 
There you have it, now you know the tax implication whether you're the creditor or the debtor in situation. 

Recommended Product: Capital Gains Tax 101. Your ultimate guide to slashing Capital Gains Tax.
 
 

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