Cape Town - The National Treasury's proposed suspension of section 45 of the Income Tax Act will no longer be necessary, it was announced on Wednesday.
Alternatives would be put in place, National Treasury and the SA Revenue Service (Sars) said in a joint statement.
The draft taxation laws amendment bills, 2011, which contained the 18-month suspension of section 45, were published on June 2.
"These bills come during a difficult economic period when global growth continues to be subdued, along with slowed prospects for revenue growth."
The suspension was intended to temporarily close section 45 as a tax-free mechanism to obtain interest deductions linked to excessive debt, and to provide the fiscus with interim protection against the potential loss of R3bn to R5bn a year.
"These annual losses stem from the structural problem of excessive debt, along with the use of share-like instruments masquerading as debt," they said.
Since June 3, Treasury and Sars held talks with interested parties, which culminated in a week of meetings consisting of over 30 consultations relating to more than 50 transactions.
"Those engaged in more aggressive transactions were less forthcoming, but some individuals disclosed critical information that pinpointed the precise areas of concern."
This consultation therefore reaffirmed the decision to put controls on excessive debt.
Given the additional facts provided, a solution was now being proposed for the short term, which should better accommodate the pressing needs of businesses while simultaneously providing effective interim protection for the fiscus.
"Commercially orientated transactions must be allowed to proceed as long as such transactions do not contain unacceptable tax leakage.
"It should be noted that our goal was never to impede commercially-driven transactions of this nature, but merely to prevent certain taxpayers and their advisors from exploiting weaknesses in the tax system."
It was now proposed that a section be introduced to control the interest deductions associated with debt used to fund the acquisition of assets in section 44, 45, or 47 transactions, which would follow different channels.
Interest deductions arising from transactions in the green channel would be automatically permissible.
Interest deductions on associated debt for amber transactions would only be permitted upon pre-approval.
Transactions not approved would not be allowed an interest deduction.
"This approach is guided by the need to reduce administrative burdens for most legitimate transactions," Treasury and Sars said.
"In the light of this approach the suspension of section 45 will no longer be necessary."
A longer-term set of solutions to deal with excessive debt and the characterisation of debt is still planned for 2012 and beyond.
Sars would continue to investigate a number of pre-existing aggressive transactions that deliberately avoided paying their fair share of the tax burden.
"Finally, it must be understood that the proposed controls to limit excessive debt comes at a time of huge fiscal challenges and developmental needs.
"It is improper and immoral for tax advisors to raid the fiscus so that short-term interests are placed above the national interest," Treasury and Sars said.