Page 288 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
• a resident’s minor child when the underlying income is deemed to have accrued to that resident parent under section 7(3) or (4);
• a trust or the bene ciary of a trust when paragraphs 68 to 72 of the Eighth Schedule deems the gain to have accrued to that resident;
• a trustee of a discretionary trust when section 25B(2A) applies to include an amount in that resident’s taxable income;
• a partnership (established in a foreign country that treats a partnership as a person for tax purposes) in respect of an
amount included in that resident partner’s taxable income; and
• a CFC in respect of a proportional amount included in that resident’s taxable income under section 9D.
4.5 Limitation on the amount of the rebate [section 6quat(1B)(a)]
The amount of foreign taxes which qualify for the section 6quat(1) rebate in a particular year of assessment is the lesser of –
• the sum of the qualifying foreign taxes;* or
• the amount calculated under the limitation formula as set out below.
The limitation formula is calculated as follows:†
Taxable income derived from all foreign sources (A) ___________________________________________ × Normal tax payable on (B)
Taxable income derived from all sources (B)
‘Taxable income derived from all foreign sources’ includes all amounts of foreign source income that were included in the resident’s total taxable income regardless of the rate of foreign tax (if any) to which those amounts are subject. The taxable income of both the numerator and the denominator is determined according to South African tax law.
Normal tax is the South African tax calculated on taxable income before the deduction of any rebates contemplated in sections 6, 6A, 6B, 6quat(1) and 6quin respectively.
The purpose of the limitation in section 6quat(1B)(a) is to ensure that the rebate granted for foreign taxes paid only relates to the foreign income included in a resident’s taxable income. Hence if no foreign income is included in a resident’s taxable income, no foreign tax rebate will be available even if the resident paid foreign tax. The purpose of the section 6quat(1) foreign tax rebate is not to provide relief for all foreign taxation thereby subsidising the tax base of foreign jurisdictions, but rather to provide relief to residents for the foreign taxes proved to be payable to the extent that the foreign-sourced amount has also been taxed in SouthAfrica.
The application of the limitation formula results in normal tax only being reduced by foreign taxes payable on foreign- source amounts; it cannot reduce normal tax payable on South African-source amounts. The limitation is an ‘overall’ limitation in the sense that all the foreign-source amounts derived from different foreign sources are added together without being subdivided further between the different foreign countries from which the amounts were derived. This is in contrast to the ‘per country’ limitation or the ‘per income item’ limitation adopted in somecountries.
Effectively the ‘overall’ limitation divides a resident’s taxable income into two separate components, namely, taxable income derived from –
• a source within South Africa; and
• a foreign source.
Under an overall limitation system, all qualifying foreign taxes are aggregated and the rebate is limited (capped) at the lesser of the aggregate of the foreign taxes payable and the proportion of normal tax payable on the resident’s foreign taxable income as calculated by the limitation formula. Before applying the limitation formula, one must in the rst instance determine –
• what income is sourced within South Africa; and • what income is sourced outside South Africa.
In this regard please refer to the discussion in 4.2.1.
Secondly, a taxable income computation must be performed under South African tax principles and requirements in order to determine the taxable income resulting from the –
• the income derived from sources within South Africa; and
• the income derived from foreign sources.
In determining the taxable income derived from a foreign source –
• any expenditure incurred which is directly attributable to such income must be deducted from such income (assuming
it meets the requirements for deductibility under the relevant section and irrespective of whether such expenditure is
incurred in or outside South Africa); and
• a portion of any general expenses incurred which are not directly attributable to income derived either from a source
within South Africa or a source outside South Africa, for example, head of ce expenses, must be apportioned between taxable income‡ derived from –
o a source within South Africa; and
o a foreign source,
* The sum of qualifying foreign taxes is potentially limited in relation to situations dealing with capital gains (see 4.6) and attributed income of CFCs (see 4.7).
† Section 6quat(1B)(a).
‡ Assuming it meets the requirements for a deduction.
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