Debt Vs Equity

Question 1

S8F

Answer 1

• Debentures (TVM), not repayable on demand meet the definition of hybrid debt instrument
  -hybrid debt instrument as defined in
  section 8F(1), as the obligation to pay an amount owing has been deferred by reason
  of the obligation being conditional upon the market value of the assets of Kubanda
  not being less than its liabilities
• Start with s24J
• Convertible debentures constitute an instrument as defined (interest bearing debt) issued by resident Co
• Co is entitled to convert into shares therefore meets definition of hybrid instrument
  ( if convertible at option of the holder or for a number of shares determined in reference to MV of shares it is not a hybrid)
• Interest incurred is deemed dividend in specie
• Amount is subject to Dividend tax
• If resident Co dividend in specie it is exempt from dividend tax provided they submit declarations and undertakings
• Interest is not allowed as a deduction in terms of s24J

Conversion of debentures into equity shares

• This would constitute a hybrid debt instrument in terms of section 8F. -Consequently any interest incurred by Capital would be denied as a deduction in terms of section 8F(2).
• The investors would however continue to receive taxable interest as this remains an income instrument (as defined in section 24J) from their perspective.
• Should all the investors be natural persons they would qualify for the basic interest exemption.

Question 2

s8F general principles

Answer 2

• Start with s24J first then come to s8F
• s8F applies to issuer (SA company). Meet trade and in production of income
• Instrument converted to another instrument and not shares is excluded in terms of s8F and if dealing with SBC
• Deferment of obligation
• In respect of a Company.
• Interest in terms of s24J
• Anti avoidance provision