Page 182 - SAIT Compendium 2016 Volume2

Income Tax acT: InTeRPReTaTIon noTes IN 3
capital and any share premium contributed by such shareholders (less so much of such share capital and share premium as has been lost) as remains after deducting therefrom an amount equal to so much of any pro ts, not of a capital nature, which are deemed by this proviso (after applying subparagraph (aa) of this paragraph) to be available for distribution to such shareholders at the commencement of the winding-up or liquidation, as relates to the said share capital, be deemed to be a pro t, not of a capital nature, distributed to such shareholders, but the amount of that pro t shall not be determined at an amount which exceeds the aforesaid amount:
Provided further that a reserve of any company which consists of or includes any amount transferred from the share premium account of the company shall, except to the extent to which such reserve consists of any other amount, be deemed for the purposes of this de nition to be a share premium account of, or share premium received by, such company: Provided further that for the purposes of this de nition ‘pro ts’ includes realised and unrealised pro ts of a company whether or not those unrealised pro ts have been recognised in the nancial records of the company;
Income Tax Interpretation Note 3
Resident: De nition in Relation to a Natural Person – Ordinary Resident
IN 2 (3)
DATE: ACT: SECTION: SUBJECT:
1. Background
4 February 2002
INCOME TAX ACT, 1962 (the Act)
Section 1
Resident: De nition in Relation to a Natural Person – Ordinary Resident
The income tax system in South Africa changed from a source-based system of taxation to a residence basis of taxation with effect from years of assessment commencing on or after 1 January 2001.
The consequential amendments to the Act have the effect that South African residents are, but for certain exclusions/exemptions, subject to income tax on their worldwide income, i.e. income derived within and outside South Africa. Non-residents will remain taxable on their South African actual or deemed source income. The normal source principles as determined and developed by our courts continue to be applicable and can, therefore, not be ignored.
The de nition of ‘gross income’ in section one of the Act has been amended to include a reference to the word ‘resident’ which has also been de ned in section one and means a natural person who is:
• ordinarily resident in South Africa; or
• physically present in South Africa for a speci ed period (physical presence test).
In other words, two tests are applicable to determine whether or not a person is a resident of South Africa, i.e. the ordinarily resident test and physical presence test. The physical presence test is dealt with in Interpretation Note 4 dated 4 February 2002. The implication of agreements for the avoidance of double taxation is also not considered in this document.
The Act does not de ne ‘ordinarily resident’, and therefore the interpretation given by the courts must be followed.
2. The law
Although the Act does not de ne ‘ordinarily resident’, the courts have interpreted the concept to mean the country to which a person would naturally and as a matter of course return from his/her wanderings. It might therefore be called a person’s usual or principal residence and it would be described more aptly, in comparison to other countries as the person’s real home. The above approach was followed in the case, Cohen v CIR (13 SATC 362) and con rmed in the case CIR v Kuttel (54 SATC 298).
The leading Canadian case is Thompson v Minister of National Revenue 2 DTC 812 (SCC). In this case it was held that a person is ordinarily resident in the place ‘where in the settled routine of his life he regularly, normally or customarily lives’ or ‘at which he in mind and in fact settles into or maintains or centralises his ordinary mode of living with its accessories in social relations, interest and conveniences’. The English case Shah v Barnet London Borough Council and Other Appeals 1983 1 ALL ER 226 (HL) 234b-c describes the meaning of ‘ordinarily resident’ as ‘that a person must be habitually and normally resident here, apart from temporary or occasional absences of long or short duration’. A wider approach was followed in interpreting the concept of ‘ordinarily resident’ in the English case. In the Kuttel judgment, Goldstone JA stated:
‘In my judgment it is neither necessary nor helpful to discuss other English decisions in which the words “ordinarily resident” were considered and interpreted with reference to English income tax legislation. I can nd no reason for not applying their natural and ordinary meaning to the provisions now under consideration.’
In summary, the courts have held in ascribing a meaning to the concept ‘ordinarily resident’ that it refers to —
• living in a place with some degree of continuity, apart from accidental or temporary absence. If it is part of a person’s ordinary regular course of life to live in a particular place with a degree of permanence, he/she must be
regarded as ordinarily resident (Levene v Inland Revenue Commissioner [1928] ALL ER Rep. 746 (HL));
• the place where his/her permanent place of abode was, where his/ her belongings were stored, which he/she left for
temporary absences and to which he/she regularly returned after such absences (H v COT 24 SATC 738);
• the residence must be settled and certain and not temporary and casual (Soldier v COT 1943 SR);
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