Page 297 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
outside South Africa or the disposal of an asset which is subject to foreign tax or which is attributable to a foreign permanent establishment). In these circumstances the amount of any foreign taxes levied on the taxable capital gain that potentially quali es for a section 6quat(1) rebate is limited to the amount of normal tax attributable to that taxable capital gain [paragraph (iB) of the proviso to section 6quat(1B)(a)], that is:
Amount of foreign taxable capital gain [falling in paragraph (iB)
of the proviso to section 6quat(1B)(a)] included in taxable income × Normal tax payable on (A)
Total taxable income from all sources (A)
A limitation calculation is performed per foreign capital gain when more than one foreign capital gain falls within step 2. No provision is made for the aggregation of foreign capital gains in applying paragraph (iB) of the proviso to section 6quat(1B)(a). Any balance of excess foreign taxes excluded by the limitation under step 2 is forfeited and does not qualify for a deduction under section 6quat(1C) or any other section. In addition, any balance of excess foreign taxes may not be carried forward to the following year of assessment to qualify for a foreign tax rebate in that year under paragraph (ii) of the proviso to section 6quat(1B)(a). See Example 30.
Step 3 – The overall normal tax on taxable income limitation [section 6quat(1B)(a)]
Once the limitations in steps 1 and 2 have been applied, the remaining taxes are added to the other qualifying foreign taxes proved to be payable on the amounts contemplated in section 6quat(1)(a) to (f). The nal step in the limitation process is then performed, namely, the limitation under section 6quat(1B)(a) - see 4.5.
Example 30 – Limitation on the foreign tax credit available for an asset not attributable to a foreign permanent establishment
Facts:
A South African resident company invested in 5% of the shares of a foreign company resident in Country T. The shares were acquired for R100 000. The resident company has no presence in Country T. The resident company disposes of the shares in the year of assessment for R1 000 000. Country T subjects the gain realised on the sale of the shares to a withholding tax at a rate of 30%.
Other income and foreign tax items for the year of assessment:
Income
Taxable income sourced in South Africa
Interest income sourced in Country T
Foreign Taxes
Withholding tax levied on the interest income sourced in Country T
Withholding tax levied on the foreign capital gain (R1 000 000 – R100 000) × 30%
Result:
(a) Taxable capital gain from the disposal of the shares
In South Africa the taxable capital gain is determined as follows: Net capital gain (R1 000 000 – R100 000)
Inclusion rate for a company
Taxable capital gain
(b) Normal tax payable
Taxable income sourced in South Africa Interest income sourced in Country T Net capital gain sourced in Country T Taxable income
Normal tax at 28% = R307 832
R
300 000 200 000
20 000 270 000
900 000 66,6% 599 400
300 000 200 000 599 400
1 099 400
(b) Application of the three step limitation in section 6quat for a foreign taxable gain not attributable to a foreign permanent establishment of a resident
Step 1 – The comparative inclusion limitation:
Amount of foreign taxable capital gain included in taxable income ______________________________________________________ × Foreign tax payable
Amount of foreign capital gain subject to foreign taxes
= R599 400 / R900 000 × R270 000 = R179 820
saIT comPendIum oF Tax LegIsLaTIon VoLume 2 289