Page 140 - SAIT Compendium 2016 Volume2

PN 5/1999 Income Tax acT: PracTIce noTes PN 5/1999
3.5 Listed shares
For the purposes of section 9B of the IT Act, a share loaned in terms of a lending arrangement is deemed not to be a disposal in the hands of the lender and the share loaned and any replacement share will be regarded as one and the same share in the hands of the lender. Where a lender lends shares to a speci c borrower and the marketable securities are not re-registered in the lender’s name prior to expiry of the 12-month period, the loan of the shares will not constitute a lending arrangement. The lender will, for purposes of section 9B, have disposed of his shares on the date the shares were transferred to the borrower in terms of the arrangement.
3.6 Repurchase and resale agreements
The de nition of ‘instrument’ in section 24J (1) of the IT Act includes repurchase and resale agreements. In essence these agreements provide for the disposal of an asset by a person to another person, at a consideration and subject to an undertaking that the other person will, at a future date, resell the asset or a similar asset to the person who rst disposed of the asset. These agreements do not qualify as lending arrangements, as de ned in the SD Act and must, therefore, for Income Tax and Stamp Duty purposes, be treated as a sale of and transfer of ownership in the asset between the parties to the agreement.
Any ‘manufactured dividend’ or ‘manufactured interest’ which is payable or receivable or which forms part of the consideration in respect of a repurchase or resale agreement will be taken into account in determining the amount of interest to be incurred or accrued in terms of section 24J of the IT Act, in respect of the relevant agreement.
4 Tax on retirement funds
The Tax on Retirement Funds Act 38 of 1996, de nes ‘rental income’ to include, inter alia, any consideration payable by a borrower to a lender, in respect of any lending arrangement as consideration for the use of the marketable security in so far as such amount is not included in the de nition of interest in section 24J of the IT Act. Therefore, the fee in respect of the lending of interest-bearing marketable securities, as well as the lending of marketable securities which are equity, will constitute ‘rental income’, as de ned.
As the ‘manufactured interest’ is included in the de nition of ‘interest’, as contemplated in section 24J of the IT Act, such amounts are also subject to the Tax on Retirement Funds.
A ‘manufactured dividend’ in respect of a ‘lending arrangement’ does not constitute ‘interest’ or ‘rental’ as de ned in the Tax on Retirement Funds Act.
5 Value-added tax
In terms of the Value-Added Tax Act 89 of 1991 (VAT Act), the supply of goods or services by a vendor in the course or furtherance of any enterprise carried on by him is subject to VAT at the standard rate, unless the supply is speci cally exempt or subject to VAT at the zero rate.
Section 12(a) of the VAT Act exempts from tax the supply of any nancial services, as de ned in section 2 of the VAT Act, except where such services are subject to the zero rate, e.g. certain supplies of services to non-residents.
As regards scrip lending, the following provisions of section 2 are applicable:
‘Financial services. —
(1) For the purpose of this Act, the following activities shall be deemed to be nancial services:
(a) ... ..
(b) ... ..
(c) The issue, allotment, drawing, acceptance, endorsement or transfer of ownership of a debt security; (d) the issue, allotment or transfer of ownership of an equity security;
(e) ...
(f) the provision by any person of credit under an agreement by which money or money’s worth is provided by that
person to any other person who agrees to pay in the future a sum or sums exceeding in aggregate the amount of such
money or money’s worth; (g) to (l) ...
Provided that the activities contemplated in paragraphs (a), (b), (c), (d) and (f) shall not be deemed to be nancial services to the extent that the consideration payable in respect thereof is any fee, commission merchant’s discount or similar charge, excluding any discounting cost.’
A fee or commission charged by a vendor for making scrip available to another person, is, in view of the proviso to section 2(1), not consideration for a nancial service and is, accordingly, subject to VAT.
The view is, however, held that a ‘manufactured dividend’ or ‘manufactured interest’ constitutes consideration for the supply of a nancial service, as envisaged in section 2(1)(c), (d) and (f), and does not constitute a fee, commission or similar consideration, as envisaged in the proviso. Such consideration is therefore in respect of the supply of a nancial service which is exempt from VAT in terms of section 12(a) of the VAT Act.
If a single amount is payable to a lender and such amount constitutes both a fee or commission and a ‘manufactured dividend’ or ‘manufactured interest’, it is essential that, for purposes of section 10(22) of the VAT Act, the amounts attributable to the fee or commission and that attributable to the ‘manufactured dividend’ or ‘manufactured interest’
132 SAIT CompendIum oF TAx LegISLATIon VoLume 2