Page 295 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
4.6.2 Inclusion of a foreign-source taxable capital gain in taxable income
In determining whether the net capital gain includes a capital gain from a foreign source, a resident may choose the order in which capital gains are reduced by any capital losses and the order in which an assessed capital loss carried forward from the previous year of assessment is applied against capital gains. Accordingly, in determining the aggregate capital gain, a resident may rstly allocate capital losses against those capital gains on which no foreign tax liability was incurred. Any excess capital losses must then be applied against those capital gains derived from a foreign source which have been subject to foreign tax. Further, in determining the net capital gain, the resident may rstly allocate carried forward assessed capital losses against those capital gains on which no foreign liability was incurred.
This is relevant when calculating the general limitation (see 4.5) as it impacts on the calculation of total foreign taxable income (that is, analysing what portion of the net capital gain is foreign and hence included in taxable income from all foreignsources).
4.6.3 Source of a capital gain
Section 9(2)(j) and (k) and section 9(4)(d) provide the source rules for capital gains and losses. Section 9(2)(j) provides that the source of any capital gain or loss resulting from the disposal of immovable property or any interest or right of whatever nature to or in immovable property contemplated in paragraph 2 of the Eighth Schedule, is in South Africa if the property is located in South Africa.
Section 9(2)(k) provides that any capital gain or capital loss resulting from the disposal of an asset [other than an asset contemplated in section 9(2)(j)] is derived from a South African source when the asset is disposed of –
• by a person who is a resident and -
o the asset is not attributable to a permanent establishment located outside South Africa; and
o the proceeds from the disposal are not subject to any taxes on income which are payable to a foreign jurisdiction;
or
• by a person who is not a resident and that asset is attributable to a permanent establishment of that person which is
situated in South Africa.
Conversely, a capital gain or capital loss will be derived from a foreign source under section 9(4)(d) if the asset is – • immovable property or any right or interest in immovable property located outside South Africa;
• disposed of by a person who is resident in South Africa and
o it is attributable to a foreign permanent establishment; and/or
o the proceeds on disposal are subject to a foreign tax on income; or
• the asset is disposed of by a person who is not resident in South Africa and it is not attributable to a South African
permanent establishment.
In addition to section 9(2) and 9(4), it is necessary to consider whether a particular tax treaty is relevant and accordingly
whether there are any deeming source rules in a tax treaty which override the actual source rules [see 4.2.1(c)].
4.6.4 The three-step limitation process
The portion of foreign taxes qualifying for a foreign tax rebate in respect of a foreign taxable capital gain is determined under a three-step limitation process. The three steps are as follows:
• Step 1 – The comparative inclusion limitation [section 6quat(1)].
• Step 2 – The comparative rate of tax on a foreign taxable capital gain limitation [paragraph (iB) of the proviso to
section 6quat(1B)(a)].
• Step 3 – The overall normal tax on taxable income limitation [section 6quat(1B)(a)].
Step 1 – The comparative inclusion limitation
In South Africa capital gains are taxed more favourably than ordinary income resulting in less than 100% of capital gains ultimately being included in taxable income. For example, only a certain percentage of a taxpayer’s net capital gain is included in taxable income. The percentage included depends on the identity of the particular taxpayer but varies between 0% – 66,6%.* The relevant percentages are as follows:
• A natural person or special trust 33,3%.
• The individual policyholder fund of an insurer 33,3%. • The untaxed policyholder fund of an insurer 0%.
• The company policyholder fund of an insurer 66,6%.†
* Paragraph 10 of the Eighth Schedule.
† With effect from 1 January 2016 the risk policy fund of an insurer will also be subject to an inclusion of 66,6%.
Example 28 – Source of a capital gain
Facts:
A resident acquires shares in a company which is resident in Country S. The resident disposes of the shares. Under Country S’s domestic tax laws the proceeds derived by a person who is not a resident of Country S from the sale of shares in a company resident in that country are subject to capital gains tax. The sale of the shares is not attributable to a permanent establishment in Country S.
Result:
The capital gain derived from the disposal of the foreign shares is from a foreign source because the proceeds are subject to foreign tax and are not attributable to a foreign permanent establishment [section 9(4)(d)].
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