Page 214 - SAIT Compendium 2016 Volume2

IN 9 (5) Income Tax acT: InTeRPReTaTIon noTes IN 9 (5)
Example 2 — Limitation on shares held by shareholders
Facts:
Company A, which renders information technology (IT) services to a number of clients, has two shareholders (both are natural persons) as well as four full-time employees (other than the two shareholders), who throughout the year of assessment were involved in rendering the IT services. Company A’s gross income for the year of assessment was R5.6 million. Shareholder No. 1 is the holder of a number of shares (allocated to an apartment purchased by him) in a share block company. Shareholder No. 2 is the holder of shares in company Z, which was listed on the JSE. Company Z was delisted during the year of assessment.
Result:
Company A complied with the following requirements:
1. The shares in Company A are all held by natural persons.
2. The gross income does not exceed R14 million.
3. Although Company A renders a ‘personal service’ as de ned, it employs three or more full-time employees
(excluding the shareholders) who, throughout the year of assessment, also render IT services.
4. The shares held, in the share block company, by Shareholder No. 1 are permitted under section 12E(4)(a)(ii)(cc).
Company A is, however, disquali ed to be an SBC for the following reason:
Section 12E (4) (a) (ii) (aa) indicates that a shareholder or member may not hold any shares or have any interest in any company other than a company contemplated in paragraph (a) of the de nition of a ‘listed company’ in section 1. Shares held in any other company (that is, a company whose shares or depository receipts for its shares are not listed on an ‘exchange’ as de ned in section 1 and licensed under section 10 of the Securities Services Act, 2004) are
prohibited. The shares held by Shareholder No. 2 in the delisted company, does not qualify Company A as an SBC for the year of assessment.
4.5 Limitation on investment income and income from rendering a personal service — sections 12E (4) (a) (iii) and (4) (d)
A maximum of 20% of the company’s total receipts and accruals (including all capital gains but excluding amounts of a capital nature) may consist collectively of ‘investment income’ as de ned in section 12E (4) (c), and income from the rendering of a ‘personal service’ as de ned in section 12E (4) (d). The aggregate income from investment and personal services should therefore not exceed 20% of the company’s total receipts and accruals. The personal service income may not exceed 20% of the receipts and accruals if a company, for example, has no investment income. The investment income may not exceed 20% of the company’s total receipts and accruals if the service rendered by a company is not regarded as personal service. However, if the service rendered is regarded as personal service, the 20% limitation must be applied to the income attributable to the personal service and the investment income collectively.
Investment income
Section 12E (4) (c) de nes ‘investment income’ as any income derived from dividends, royalties, rental derived from immovable property, annuities or income of a similar nature, interest as contemplated in section 24J (other than any interest earned by an SBC which is a co-operative bank), any amount contemplated in section 24K, any other income subject to the same treatment as income from money lent and any proceeds derived from investment or trading in nancial instruments, marketable securities or immovable property.
The investment income for purposes of section 12E refers mainly to amounts that represent the return on investments.
Personal service
In general terms, a personal service refers to a service rendered and for which the income derived is mainly a reward for the personal efforts or skills of an individual. However, the term is capable of expansion or limitation depending on the scope of the speci c law in which it used. Section 12E (4) (d) (as quoted below) de nes ‘personal service’ which merely lists a class of activities that would be regarded as a personal service. For the sake of clarity, the ordinary, grammatical meaning is to be ascribed to each word. Accordingly, each of these entries is to be construed in their widest possible sense.
Section 12E (4) (d)
(d) ‘personal service’, in relation to a company or close corporation, means any service in the eld of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting,
draftsmanship, education, engineering, entertainment, health, information technology, journalism, law, management, performing arts, real estate, research, secretarial services, sport, surveying, translation, valuation or veterinary science, if—
(i) that service is performed personally by any person who holds an interest in that company or close corporation; and
(ii) that company or close corporation does not throughout the year of assessment employ three or more full-time employees (other than any employee who is a shareholder of the company or member of the close corporation, as the case may be, or who is a connected person in relation to a shareholder or member), who are on a full-time
basis engaged in the business of that company or close corporation of rendering that service.
Provided all the other necessary requirements have been met, an SBC, which is primarily engaged in the provision of any personal service, will be able to qualify as an SBC, if—
• the company or close corporation, throughout the year of assessment, employs three or more full-time employees
who are on a full-time basis engaged in its business of rendering that service;
• the personal service in relation to a company or close corporation is not performed personally by any person who
holds an interest in that company or close corporation; and
• the investment income of the SBC does not exceed 20% of its total receipts and accruals (including all capital gains
but excluding amounts of a capital nature).
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saIT comPendIum oF Tax LegIsLaTIon VoLume 2