Page 422 - SAIT Compendium 2016 Volume2

IN 43 (5) Income Tax acT: InTeRPReTaTIon noTes IN 43 (5) 17.2 Section 8C
18. Conclusion
Preamble
In this Note unless the context indicates otherwise –
‘CGT’ means capital gains tax, being the portion of normal tax attributable to the inclusion in taxable income of a taxable capital gain;
‘Eighth Schedule’ means the Eighth Schedule to the Act;
’JSE’ means the JSE Limited, licensed as an exchange under the Financial Markets Act No. 19 of 2012;
‘section’ means a section of the Act;
‘the Act’ means the Income Tax Act 58 of 1962; and
any word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This Note provides clarity on the interpretation and application of section 9C, which deems the amount derived from the disposal of certain shares held for a continuous period of at least three years to be of a capital nature. Section 9C was inserted into the Act by section 14(1) of the Revenue Laws Amendment Act No. 35 of 2007. It was deemed to have come into operation on 1 October 2007, and applies to any disposal of a ‘qualifying share’ on or after that date.
2. Background
The rst step in determining a person’s income tax liability on the disposal of shares is to determine whether the amount received or accrued is of a capital or revenue nature. Any amount received or accrued of a capital nature is speci cally excluded from a person’s ‘gross income’ as de ned in section 1(1).
The distinction between capital and revenue is fundamental to the tax system, but neither concept has proved capable of a satisfactory de nition in the Act. The question whether shares are held as trading stock or as an investment will to a large extent depend on the intention of the taxpayer.
Despite guidelines laid down by case law, the determination of whether the amount received or accrued on the disposal of a share falls on capital or revenue account is often a contentious matter which can lead to costly and protracted legal disputes. For a discussion on the capital versus revenue issue, see the Tax Guide for Share Owners (Issue 4)* and the Comprehensive Guide to Capital Gains Tax (Issue 4),† both of which are available on the SARS website at www.sars. gov.za.
While section 9C eliminates uncertainty as to the capital nature of qualifying shares, it does not apply to all types of shares, nor does it apply to disposals of shares within three years of acquisition. Accordingly, it does not provide absolute certainty on whether income tax or CGT should be levied in all circumstances.
3. Effective date
Section 9C came into operation on 1 October 2007 and applies to the disposal of qualifying shares on or after that date.
4. De nitions [section 9C(1)] 4.1 The law
Section 9C(1)
9C. Circumstances in which certain amounts received or accrued from disposal of shares are deemed to be of a capital nature.—(1) For the purposes of this section—
‘connected person’ means a connected person as de ned in section 1, provided that the expression ‘and no holder of shares holds the majority voting rights in the company’ in paragraph (d)(v) of that de nition shall be disregarded; ‘equity share’ includes a participatory interest in a portfolio of a collective investment scheme in securities and a portfolio of a hedge fund collective investment scheme;
‘qualifying share’, in relation to any taxpayer, means an equity share, which has been disposed of by the taxpayer or which is treated as having been disposed of by the taxpayer in terms of paragraph 12 of the Eighth Schedule, if the taxpayer immediately prior to such disposal had been the owner of that share for a continuous period of at least three years excluding a share which at any time during that period was—
(a) a share in a share block company as de ned in section 1 of the Share Blocks Control Act, 1980 (Act No. 59 of 1980);
(b) a share in a company which was not a resident, other than a company contemplated in paragraph (a) of the de nition of ‘listed company’; or
(c) a hybrid equity instrument as de ned in section 8E.
4.2 De nition – connected person
The de nition of a ‘connected person’ in section 9C(1) expands paragraph (d)(v) of the de nition of a ‘connected person’ in section 1(1) in relation to a company. More speci cally, corporate shareholders are viewed as connected persons in relation to the company in which they hold at least 20% of the equity shares (even if a shareholder holds the majority voting rights). This de nition is applied for purposes of enforcing the three-year immovable property and bare dominium anti-avoidance rules in section 9C(3) – see 7.
* Issued on 17 February 2014. † Issued on 22 December 2011.
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