Page 1121 - SAIT Compendium 2016 Volume2

EXPLANATORY MEMORANDUM ON THE TAXATION LAWS AMENDMENT BILL, 2015
C. Expenses
If a share trader incurs any debt to purchase equity shares with a term longer than three years, the share trader would bene t from an interest deduction even after the equity share is deemed to be capital in nature. This provides the taxpayer with the unintended bene t of an allowable expenditure on an equity share that is of a capital nature which is contrary to current tax practice in the Act. The legislation does allow for a recoupment of all expenses upon disposal of the qualifying share but due to the possible timeframe before a qualifying share is disposed it is proposed that the legislation be tightened to close the unintended anomaly against prevailing tax policy.
III. Proposal
A. Meaning of the term disposal for purposes of section 9C
The meaning of the term ‘disposal’ in respect of an equity share that has been held for a period of at least three years should be clari ed to mean disposal as de ned in paragraph 1 of the Eighth Schedule as well as a disposal as contemplated in section 9H.
B. Removal of the de nition of ‘qualifying share’
To ensure clarity, the de nition of ‘qualifying share’ will be removed and relevant consequential amendments will be made in section 9C to more clearly re ect the policy intent that (a) any amount received or accrued (including a return of capital) and (b) that any expenses incurred in respect of an equity share that has been held for a period of at least three years will be deemed to be of a capital nature.
C. Return of capital or expenses incurred in respect of an equity share
A return of capital on equity shares held for a period of at least three years will be treated as a capital receipt. Any expenditure that is incurred in respect of an equity share that has been held for a period of at least three years will be deemed be of a capital nature and will not be deductible. It is important to note that the tax deductible expenditure incurred in relation to the equity share prior to being held for a period of at least three years will still be subject to recoupment upon disposal.
IV. Effective date
The proposed amendments come into operation on 1 January 2016 and apply in respect of years of assessment commencing on or after that date.
2.4 REMOVING POTENTIAL ANOMALIES ARISING FROM CANCELLATION OF CONTRACTS
[Applicable provisions: Paragraphs 3, 4, 11, 20 and 35 of the Eighth Schedule]
I. Background
The cancellation of any contract is regarded as a disposal for capital gains tax purposes as contemplated in the Eighth Schedule. The tax treatment of such cancellation will be determined by a facts and circumstances test to draw a distinction between whether the contract was cancelled in the same year of assessment in which the contract was entered into or if that contract was cancelled in the subsequent year of assessment in which the contract was entered into. The Eighth Schedule further makes the distinction between the taxpayers involved in the contract and the two distinctive separate tax events – the original owner that initially disposes of an asset to another person and the new owner that obtains the asset from the original owner, but that is deemed to dispose of the asset back to the original owner upon the cancellation of the contract.
A. Same year cancellation
When a contract is entered into and cancelled in the same year, the Eighth Schedule contains distinct adjustment rules with the intention too effectively from a taxation point of view, put the taxpayers in a zero tax position as if they never entered into the transaction.
B. Subsequent year cancellation
However, from a tax event perspective if the cancellation of a contract occurs in a subsequent year to when it was entered into, in summary, based on the application of current legislation, the original owner will have a deemed capital loss equal to the proceeds received in the year of disposal while the base cost in the year of the original disposal is treated as capital gain in the year of cancellation. The intended policy effect was to reverse the previous year’s capital gain on the asset as an aggregate capital loss in the year of cancellation.
II. Reason for change
At issue is the anomaly relating to the base cost of the asset in the hands of the original owner that arises when a contract is cancelled in either the current or subsequent year of assessment which can be subject to abuse. This is especially prevalent between connected persons.
A. Same year cancellation
The current adjustment rules as contemplated in the Eighth Schedule is awed in that it allows a reduction of the proceeds in the hands of the original owner to the value of the amount that has been repaid or has become repayable to the person to whom the asset was sold. This has a netting effect on the amount of proceeds effectively reducing it to nil. However, the base cost of the asset in the hands of the original owner is unaffected resulting in a possible capital loss in the hands of the original owner. The disposal of the asset in the hands of the new owner as a result of the subsequent cancellation of the contract is also subject to the current adjustment rules that would give rise to the same tax effect as the normal disposal rules as contemplated in the Eighth Schedule had they been applied. In lieu of anomalies faced
SAIT CompendIum oF TAx LegISLATIon VoLume 2 1113