Debt defeasance : an income tax loophole or a pointless pursuit

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dc.contributor.advisor Prof. L. Olivier en_US
dc.contributor.author Bryant, Cathrine
dc.date.accessioned 2012-08-15T08:53:46Z
dc.date.available 2012-08-15T08:53:46Z
dc.date.issued 2012-08-15
dc.date.submitted 2000-05-05
dc.identifier.uri http://hdl.handle.net/10210/5797
dc.description LL.M. en_US
dc.description.abstract The concept of a debt defeasance transaction has recently come under scrutiny in the South African financial market. In the financial arena lower lending rates and efficient tax planning are of paramount consideration to corporate entities seeking to raise finance and to properly structure their affairs. Debt defeasance transactions recognise the time value of money. Companies with long-term borrowings obtain financial advantages if those borrowings can be retired early as the present value of the liability is less than the face value thereof. The objective of this paper is to present a comparative study of the manner in which debt defeasance transactions have been dealt with in the Australian jurisdiction and how the South African courts would view the income tax consequences of such transactions. The choice of the Australian jurisdiction finds its motivation in the similarity of the income tax regime of that country with the system applied in South Africa. Although the Australian income tax legislation allows for a wider range of income to be recognised as assessable income (hence the frequent references to "income according to ordinary concepts" in the judicial pronouncements in that country) the concept of an accrual of income is recognised and applied in the Australian legislation in a similar manner to that of the South African income tax legislation. In addition, there have been a number of recent decisions in the Australian courts on debt defeasance transactions that were implemented during the 1980's. Given that the South African courts are mindful of developments in 2 Australia and will seek guidance from that jurisdiction, the contemporary nature of the Australian decisions referred to below is insightful and useful in a comparative study. The conclusions reached in this dissertation are that the income tax benefits sought by the parties to the transaction and which are pivotal to the success of the transaction, will not be available in the South African context, just as they are not available in Australia. In certain circumstances the debt defeasance profit, as it is termed in this paper, will be fully taxable in the hands of the taxpayer to whom it accrues, particularly in regard to instantaneous defeasances and where the taxpayer is a financial institution. It is this outcome of the application of the general principles of the South African income tax legislation that leads to the failure of the transaction as a fund raising tool in the structured finance environment. Thought has been given to whether or not the South African legislation should be amended to cater specifically for the debt defeasance transaction. There are no issues that are created by these transactions, such as mismatches in the timing of accruals and deductions as is the case in the trading of financial instruments, that are not already catered for in the current income tax legislation. The main enquiry in determining the consequences of a debt defeasance transaction is in the application of the gross income definition in section 1 of The Income Tax Act 58 of 1962. The application of the gross income definition is trite law and the judicial pronouncements thereon are 3 adequate guidance and it is submitted that no amendment to the Income Tax Act is required to cater for debt defeasance transactions. The structure of this paper will be to give an overview of the mechanics of debt defeasance transactions and the defeasance transactions and the consequences thereof. A survey of the Australian examples of debt defeasances is undertaken and the judgements given by the Australian courts in response to such transactions are canvassed. An analysis will finally be undertaken on the income tax consequences of debt defeasances as they have been imported into South Africa en_US
dc.language.iso en en_US
dc.subject In substance defeasance - South Africa en_US
dc.subject In substance defeasance - Australia en_US
dc.subject Comparative law en_US
dc.subject Income tax deductions for losses - South Africa en_US
dc.subject Income tax deductions for losses- Australia en_US
dc.title Debt defeasance : an income tax loophole or a pointless pursuit en_US
dc.type Thesis en_US

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