Page 291 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Example 25 – Determination of rebate (subject to limitation)
Facts:
During year 1 a resident company conducted share-dealing activities through a branch run by a dependent agent in Country M. (A dependent agent46 may create a permanent establishment, unlike an independent agent.)
The branch bought foreign shares in a foreign company resident in Country M for R10 000 and received a gross payment of R1 000 from which withholding tax of R150 was payable. The payment was made from the foreign company’s income reserves. Under Country M’s tax laws the amount distributed is treated as a payment of interest and not as a payment of a dividend. The shares are held by the resident company as trading stock. During the same year of assessment the foreign branch sold the shares for R9 500. The sale of the shares did not result in a tax liability in Country M. Expenses of R300 were incurred on these transactions. No other transactions or activities were concluded by the resident company during year 1.
Result:
The amount received by the resident company does not constitute a foreign dividend47 for South African tax purposes because the foreign payment is not treated as a dividend for income tax purposes under the tax laws of the country where the company paying the foreign amount is resident. The receipt of R1 000 accordingly constitutes a revenue receipt as the shares were held as trading stock and the payment was against the foreign company’s income reserves (that is, it was not a capital distribution).
Calculation of South African taxable income:
Sale of shares Revenue receipt
Less: Purchase cost
Other expenses
Taxable income – foreign-source
Taxable income – South African-source
Taxable income (all sources)
Normal tax payable (R200 × 28%)
Foreign withholding taxes
Calculation of the limitation of the rebate:
Taxable income derived from all foreign sources _______________________________________ × Normal tax payable
Taxable income derived from all sources
= (R200 / R200) × R56 = R56
R
9 500
1 000 10 500
(10 000) (300)
200 Nil 200 56 150
The rebate relief is limited to R56.
The amount of foreign taxes due is R150, however the limitation formula applies to limit the rebate in year 1 to R56. The excess of R94 (R150 – R56) does not qualify for a foreign tax rebate in year 1 but may be carried forward to year 2 in which it will be deemed to be foreign tax paid in that year on foreign-source income.
4.5.1 Application of paragraph (i) of the proviso to section 6quat(1B)(a) to deductions in respect of retirement annuity fund contributions and donations to certain organisations
In determining the taxable income derived from South African-source income and from foreign-source income, any deductions claimed for retirement annuity fund contributions [section 11(n)] and donations to certain organisations (section 18A) must be apportioned on a pro rata basis between income derived from those sources.
In the context of paragraph (i) of the proviso to section 6quat(1B)(a), ‘income’ must be interpreted to mean taxable income as determined before each of the aforementioned deductions. The deductions must therefore be apportioned on a pro rata basis between taxable income derived from –
• sources within South Africa; and
• foreign sources,
as calculated before taking each deduction into account.
The following sequence must be followed in order to calculate the correct amounts in respect of the deductions under sections 11(n) and 18A respectively:
R Gross income as de ned in section 1(1) from all sources XXX Less: Exempt income under section 10 (XXX) Income XXX Less: Deductible expenditure (XXX) Add: Taxable capital gain from all sources XXX
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