Abstract
LL.M.
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
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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
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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