Page 174 - SAIT Compendium 2016 Volume2

IN 2 (3) Income Tax acT: InTeRPReTaTIon noTes IN 2 (3)
Interpretation Note 2 (Issue 3)
Foreign Dividends — Deductibility of Interest
DATE: ACT: SECTION: SUBJECT:
Preamble
17 March 2009
INCOME TAX ACT 58 OF 1962 (the Act) Section 11C
Foreign Dividends — Deductibility of Interest
In this Note—
• references to ‘sections’, ‘subsections’, ‘paragraphs’ are to sections, subsections and paragraphs of the Act unless
otherwise stated;
• ‘portfolio investor’ means any person holding less than 10% of the equity share capital of a company or less than 10%
of the participatory interest in a collective investment scheme; and
• the terms ‘South Africa’ and ‘the Republic’ are used interchangeably as they have the same meaning for purposes
of this Note.
1. Purpose
This Note provides guidance to portfolio investors, who are natural persons, on the application of those provisions of the Act that are relevant in determining taxable income derived from foreign dividends.
Although this Note only applies to natural persons, most of the principles dealt with also apply to other taxpayers, for example, companies and trusts.
2. Background
Interpretation Note No. 2 (Issue 2) ‘Foreign Dividends — Deductibility of Interest’, issued on 28 August 2002, dealt with the application of section 9E (5A), which provided for the deduction of any interest expenditure actually incurred by any South African resident in the production of foreign dividend income, when the resident is a natural person and a portfolio investor.
Section 9E was repealed by section 23 (1) of the Revenue Laws Amendment Act, No. 45 of 2003 with effect from 1 June 2004. The repeal of section 9E applies to any foreign dividend received or accrued during any year of assessment commencing on or after 1 June 2004. In the case of an individual, the rst year of assessment commencing after 1 June 2004 is the 2006 year of assessment, which commences on 1 March 2005. Section 9E therefore applies, for example, in the case of individuals, to dividends received or accrued before 1 March 2005 (that is, to the [sic] 2005 and previous years of assessment). The date when section 9E ceases to apply to a company will depend on the company’s year of assessment.
Interpretation Note No. 2 (Issue 2) is therefore still relevant to foreign dividends received by or accrued to a natural person who is a resident during the period that section 9E remains effective.
Section 9E (5A) was incorporated in section 11C. Section 11C was inserted by section 18 (1) of the Revenue Laws Amendment Act 32 of 2004, deemed to have come into operation on 1 June 2004 and, in so far as it relates to the deduction of any interest as contemplated in section 11C (1), (2) and (3), applicable to any interest incurred or balance of interest carried forward under section 9E (5A) to any year of assessment commencing on or after that date. Thus, section 11C took over from the date when section 9E ceased to apply. For an individual it applies to the 2006 year of assessment, namely, from 1 March 2005 to 28 February 2006. For companies the effective date will depend on the particular year of assessment.
Section 11C, which is the sole focus of this Note, provides for the deduction of any interest expenditure actually incurred in the production of foreign dividend income.
3 The law
Paragraph (k) of the de nition of ‘gross income’ in section 1 includes in the gross income of a person—
The term ‘foreign dividend’ is de ned in section 1 of the Act as follows:
Before introduction of dividends tax
any amount received or accrued by way of a dividend: Provided that where any foreign dividend declared by a foreign company—
(i) is received by or accrues to a portfolio of a collective investment scheme referred to in paragraph (e)(i) of the
de nition of ‘company’; and
(ii) is distributed by that portfolio by way of a dividend, or a portion of a dividend, to any person who is entitled to
that dividend by virtue of being a holder of any participatory interest in that portfolio,
that foreign dividend shall, to the extent that it is declared to that person as contemplated in subparagraph (ii), be deemed to have been declared by that foreign company directly to that person and to be a foreign dividend which is received by or accrued to that person;
‘foreign dividend’ means any dividend received by or which accrued to any person from a foreign company as de ned in section 9D;
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