Tax on loan account

Hi I am modelling property investments in South Africa (would be the same for most places I think).

Now the private equity portion is invested as a mezzanine loan - this reduces the tax liability because tax is calculated by the reduction in the principle, so as the senior debt is paid down, the mezzanine rolls up the interest effectively mitigating the total principle payments by the property holding company (SPV) (senior (is positive) mezz (is negative because it is rolled up and paid after selling the porperty).

On exiting the investment, the senior debt is repaid and then the mezzanine is repaid (plus rolled up interest) to the equity investor - thereafter the profits ("sale price" less "senior debt balance", "mezz debt balance", "Capital Gains" and "Sale Costs") are distributed to the shareholders according to the shareholding (e.g. 80% to equity investor and 20% to non-equity partner [there are reasons here for having a non-equity partner such as fund manager/BEE etc.).

My question: on exiting the investment and paying back the mezzanine debt to the investor (which has been rolled up), how does the tax work?, 1) I presume the equity investor (mezz debt holder) would have to pay tax on repaid interest portion of the mezz repayment.

Or put another way, when exiting the investment (repaying senior debt and CGT etc.) - the equity investor first recieves the mezz debt principle plus interest - and after that the capital gains (SPV profits) are distributed to the shareholders (this includes the equity investor ( at say 80%) and the fund manager ( at say 20%) - now for the equity investor what is the tax liabiliy on the mezzanine repayment?

Sorry if it sounds a little convoluted but I would be interested to hear what your thoughts on this are

Stuart
stuart@privatetreaty.org