Page 298 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3) Accordingly, only foreign taxes of R179 820 on the capital gain potentially qualify for a section 6quat(1) rebate before
applying steps 2 and 3.
The remaining R90 180 (R270 000 – R179 820) or (R270 000 × 33,40%) will not be taken into account because it does not relate to an amount subject to tax in South Africa. This amount is forfeited. 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)
= R599 400 / R1 099 400 × R307 832 = R167 832
Thus under Step 2 only R167 832 of the qualifying foreign taxes of R179 820 potentially quali es for the section 6quat(1) rebate. The balance of R11 988 is forfeited.
Step 3 – The overall normal tax on taxable income limitation [section 6quat(1B)(a)]
Under Step 3 the remaining qualifying foreign taxes calculated in Step 2 are added to the other qualifying foreign taxes proved to be payable in respect of the amounts contemplated in section 6quat(1)(a) to (f). The nal step is the overall limitation under section 6quat(1B)(a).
Sum of qualifying foreign taxes
Withholding tax on foreign-source interest income Withholding tax on foreign-source capital gain Total
R
20 000
167 832 187 832
Taxable income derived from all foreign sources _______________________________________ × Normal tax payable
Taxable income derived from all sources
= (R200 000 + R599 400) / R1 099 400 × R307 832 = R799 400 / R1 099 400 × R307 832
= R223 832
Thus the full amount of R187 832 quali es for the section 6quat(1) rebate.
4.7 Application of section 6quat to the attributed income of a CFC
4.7.1 General
As noted in 4.2, any portion of the net income of a CFC as contemplated in section 9D which is attributed to a resident potentially quali es for a rebate under section 6quat(1). The amount of the rebate is calculated under the three-step limitation process discussed in 4.7.2. In order to understand the three-step limitation process, it is necessary to have a basic understanding of certain key provisions in section 9D. These are summarised below.
Section 9D(2) includes in the income of a resident the ‘proportional amount’ of the ‘net income’ of a CFC. The term ‘proportional amount’ refers to the resident’s effective interest in the ‘net income’ of the CFC. ‘Net income’ is de ned in section 9D(2A) and in simpli ed terms is the CFC’s taxable income determined as if it were a resident.
The deemed inclusion in income does not apply to a resident that –
• holds less than 10% of the participation rights; and
• may not exercise at least 10% of the voting rights in a CFC.
Paragraph (i) of the further proviso to section 9D(2A) provides that the net income of a CFC in respect of a foreign tax year will be deemed to be nil when the aggregate amount of tax payable by the CFC to all spheres of government of any country other than the Republic in respect of the foreign tax year of that CFC is at least 75% of the amount of normal tax that would have been payable in respect of any taxable income of the CFC had the CFC been a resident for that foreign tax year, or* all the receipts and accruals of the CFC are attributable to a foreign business establishment which is not required to be taken into account under 9A.
Section 9D(9)(b) excludes from ‘net income’ any amount attributable to a ‘foreign business establishment’. Section 9D(9A)(a) contains a number of exceptions to this exclusion, that is section 9D(9A)(a) details a number of instances when an amount attributable to a foreign business establishment must be included in ‘net income’. For example, section 9D(9A)(a)(i)(aa) provides that any amount which is attributable to a foreign business establishment of a CFC must be taken into account in determining the net income of a CFC if that amount is derived from the disposal of goods by that CFC of goods that will be acquired directly or indirectly by a connected person (in relation to that CFC) who is a resident unless the total amount of foreign taxes payable by a CFC for a particular tax year equals at least 50% of the amount of normal tax that would have been payable by the CFC on any taxable income of the CFC had the CFC been a resident for that foreign tax year.
Under section 72A(1) a resident who directly or indirectly, together with any connected person in relation to that resident, holds at least 10% of the participation rights in a CFC (otherwise than indirectly through a resident company) must on an annual basis submit a return in the form prescribed by the Commissioner. In addition section 72A(2) requires
* With effect from years of assessment ending on or after 1 December 2014.
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