Page 296 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3) • In any other case, 66,6%.
Other examples include the exclusions which are provided for in the Eighth Schedule such as –
• the annual capital gain exclusion which may be deducted from a natural person or special trust’s aggregate capital gain
for the year;*
• the primary residence exclusion for an individual or special trust;†
• the small business assets of an individual;‡ and
• the personal-use assets of an individual or a special trust.§
In circumstances where less than 100% of a capital gain is included in taxable income, the full amount of foreign tax will not qualify for a foreign tax rebate under section 6quat(1).¶ Only so much of the foreign tax as is attributable to the portion of the capital gain which is included in taxable income will potentially qualify for the rebate. This is referred to as Step 1 – The comparative inclusion limitation and involves a comparison between the amount of the capital gain subjected to foreign tax with the amount subjected to South African normal tax, that is:
Amount of foreign taxable capital gain included in taxable income ______________________________________________________ × Foreign tax payable
Amount of foreign taxable capital gain subject to foreign taxes
No rebate will be given for amounts or portions thereof that are not subject to tax in South Africa.** The taxes disquali ed under this step are permanently disregarded and do not qualify to be carried forward to succeeding years of assessment.
In addition, the disquali ed taxes do not qualify for a deduction under section 6quat(1C) or any other section.
Thus, if a foreign country taxes 100% of a gain realised by a natural person resident in South Africa while South Africa only taxes 33,3% of that gain, only 33,3% of the foreign taxes on the gain will potentially qualify for a foreign tax rebate (that is, before the limitation in steps 2 and 3).
Example 29 – Determination of the portion of a foreign tax liability that relates to a foreign taxable capital gain
Facts:
A natural person resident in South Africa disposes of a xed property (which is not the resident’s primary residence) located in Country A for R1 030 000 during the resident’s 2015 year of assessment. The property was acquired for no consideration. Country A regards the proceeds as income of a revenue nature and the full amount is subject to tax at a rate of 30%.
Result:
The foreign tax liability amounts to R309 000 (R1 030 000 × 30%). In South Africa the taxable capital gain is
determined as follows:
Capital gain
Less:
Annual exclusion (individuals and certain special trusts only) Net capital gain
Inclusion rate for an individual
Taxable capital gain
R
1 030 000
(30 000) 1 000 000
33,3% 333 000
Only 32,33% [(R333 000 / R1 030 000) × 100%)] of the foreign tax liability will potentially qualify for a foreign tax rebate. That is, of the foreign tax of R309 000 only R99 900 (R309 000 × 32,33%) will qualify for a foreign tax rebate. The remaining R209 100 (R309 000 × 67,67%) will not be taken into account because it does not relate to an amount subject to tax in South Africa. The excess amount of R209 100 (R309 000 – R99 900) is forfeited and may not be carried forward and taken into account in the succeeding year of assessment.
Step 2 – The comparative rate of tax on a foreign taxable capital gain limitation [paragraph (iB) of the proviso to section 6quat(1B)(a)]
The amount of foreign tax which potentially quali es for a rebate is further limited if a resident derives a foreign-source capital gain†† on the disposal of an asset (that is, a capital gain arising on the disposal of immovable property located
* Paragraph 5 of the Eighth Schedule.
† Paragraph 45 of the Eighth Schedule.
‡ Paragraph 57(2) of the Eighth Schedule.
§ Paragraph 53 of the Eighth Schedule.
¶ In contrast, in circumstances where 100% of the gain is included in taxable income but less than 100% of the gain
is subject to foreign tax, a gross up of the foreign tax is not applicable.
** This principle in section 6quat(1) is not unique. For example, the Australian Tax of ce and the HRMC also
limit the amount of foreign tax credits where the full gain is not taxed in Australia or the UK respectively. (See ATO ID 2010/175 titled Foreign income tax offset: entitlement where foreign capital gain is only partly assessable in Australia http://law.ato.gov.au/atolaw/print.htm?DocID=AID%2FAID2010175%2F00001&PiT=99991231 235958&Life=20100917000001-99991231235959 [Accessed 12 February 2015] and INTM169140 - UK residents with foreign income or gains: capital gains tax: Amount of foreign tax credit relief - extent to which a gain is doubly taxed – www.hmrc.gov.uk/manuals/intmanual/INTM169140.htm [Accessed 12 February 2015]).
†† See section 9(4)(d).
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