Page 176 - SAIT Compendium 2016 Volume2

IN 2 (3) Income Tax acT: InTeRPReTaTIon noTes IN 2 (3)
This exemption is not, however, available when the underlying pro ts have been or will be exempt, or taxed at a reduced rate in the Republic as a result of the application of any agreement for the avoidance of double taxation (section 10 (1) (k) (ii) (aa) (A))
• A foreign dividend will be exempt if it arose directly or indirectly from any dividends declared by any company which is a resident in South Africa (section 10 (1) (k) (ii) (aa) (B)).
b. A foreign dividend will be exempt to the extent that it relates to any amount which was declared by a listed company which complies with both paragraphs (a) and (b) of the de nition of ‘listed company’ in section 1 (section 10 (1) (k) (ii) (bb)).*
4.2.2 Basic investment income exemption — section 10 (1) (i) (xv)
Section 10 (1) (i) (xv) provides for a basic investment income exemption, which is determined under a two-step process. The rst part of the exemption applies to foreign dividends and interest from a source outside South Africa. The second part of the exemption deals with local taxable dividends and South African-sourced interest.
The foreign dividend and non-South African source interest exemption (section 10 (1) (i) (xv) (aa))
A maximum of R3 200 is available for foreign dividends and foreign-sourced interest. For the 2010 year of assessment it is proposed that the amount be increased to R3 500. This limitation applies to foreign dividends rst after which the balance, if any, is applied against any foreign-sourced interest. Any foreign dividends which are exempt from income tax under section 10 (1) (k) (ii) must rst be deducted from a natural person’s gross income from interest and dividends before applying the basic exemption. The portion of any foreign dividends and foreign-sourced interest which exceed R3 200 during the 2009 year of assessment will be fully taxable.
Example 1 — Foreign dividend exempt when declared out of pro ts taxed in South Africa
Facts:
A foreign company with a South African shareholder derives rental income from immovable property located in South Africa. The net rental income derived by the foreign company is subjected to normal tax in South Africa as the Act subjects income, derived from a South African source by a person who is not a resident, to income tax. Result:
If the company declares a dividend to its South African shareholder from the net rental income that was subject to income tax in South Africa, the dividend will be exempt from South African tax.
Example 2 — Foreign dividend exempt when declared out of dividends derived from South African-resident company
Facts:
UK Co, a United Kingdom company, holds 100% of the shares in SA Co, a South African resident. During the year SA Co declares a dividend of R100. The dividend is the only income of UK Co. UK Co in turn declares a dividend of R90 to its shareholders. X, a South African resident, holds 5% of the shares in UK Co.
Result:
The foreign dividend will be exempt from income tax in the hands of X because it arose from dividends declared by a company which is resident in South Africa.
Example 3 — Foreign dividend exempt when declared by dual-listed company
Facts:
A company, listed on both the JSE and the London Stock Exchange declares a dividend to its shareholders. Result:
The dividend is exempt from tax because the company declaring the dividend has a dual listing.
The local dividend and interest exemption (section 10 (1) (i) (xv) (bb))
Section 10 (1) (i) (xv) (bb) provides for a basic exemption for—
• interest received or accrued from a South African source, and
• dividends (other than foreign dividends) which are not otherwise exempt from tax. The basic investment exemption is as follows:
Status on last day of year of assessment
Persons 65 years or older Persons younger than 65 years
2010 R 30 000 21 000
2009 R 27 500 19 000
* An additional requirement that South African residents must own in aggregate more than 10% of the equity share capital of the foreign company declaring the dividend was deleted by s 9 (d) of the Taxation Laws Amendment Act 3 of 2008. The deletion is deemed to have come into operation as from the commencement of years of assessment ending on or after 1 January 2009.
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Year of assessment