Page 423 - SAIT Compendium 2016 Volume2

IN 43 (5) Income Tax acT: InTeRPReTaTIon noTes IN 43 (5)
4.3 De nition – qualifying share
Section 9C applies to a ‘qualifying share’ as de ned in section 9C(1). This de nition contains a number of requirements, which are discussed in the paragraphs below.
4.3.1 Equity share requirement
A share will be a ‘qualifying share’ as de ned in section 9C(1) if, amongst other things, it is an equity share as de ned in section 9C(1). The de nition of an ‘equity share’ in section 9C(1) expands the de nition of the same term in section 1(1) to include a participatory interest in a portfolio of a collective investment scheme in securities and a portfolio of a hedge fund collective investment scheme. A share in a ‘REIT’ as de ned in section 1(1) could potentially be an equity share provided it meets the requirements of the de nition of that term.*
A participatory interest in a ‘portfolio of a collective investment scheme in property’ as de ned in section 1(1) falls outside section 9C since it represents an interest in a vesting trust and is neither an ‘equity share’ nor is it deemed to be an equity share.
The term ‘equity share’ is de ned in section 1(1) as follows:†
A distribution could take the form of a dividend, foreign dividend, return of capital or foreign return of capital. As long as the right to participate in either –
• a dividend or foreign dividend; or
• a return of capital or foreign return of capital,
is unrestricted the share will be an equity share. But if both the right to dividends and the right to capital are restricted the share will not be an equity share. A share with restricted distribution rights that is convertible to one with unrestricted rights will not be an equity share until the date of conversion.
A ‘share’ is de ned in section 1(1) as follows:‡
The de nition of a ‘company’ in section 1(1) includes amongst other things a close corporation.§ A member’s interest in a close corporation comprises a ‘similar equity interest’ to a share for the purposes of the above de nition. The issued share capital of a company may consist of different classes of shares carrying different preferences, rights, limitations and other terms. Shares with limited dividend rights and rights to return of capital on liquidation (non-participating shares) do not comprise qualifying shares under section 9C since their right to participate in the distribution of dividends and capital is restricted. A share will be a qualifying share if its right to participate in dividends is unrestricted even though its right to a return of capital on liquidation may be limited to, say, its issue price (that is, it contains at least one unrestricted right).
In some cases the right to participate in dividends may be limited to pro ts from a particular source. For example, a holding company may have three subsidiaries, A, B and C. The A class shares of the holding company are entitled to participate in the dividends from A, the B class shares are entitled to participate in the dividends from B and the C class shares are entitled to participate in the dividends from C. These respective entitlements do not mean that the right to participate in dividends is restricted to a particular amount. Both listed and unlisted equity shares comprise qualifying shares for the purposes of section 9C.
Options and other rights to acquire qualifying shares are not equity shares and fall outside section 9C. Likewise convertible debt (for example, a convertible debenture) does not comprise a share until conversion has occurred and is also not a ‘qualifying share’.
4.3.2 Disposal requirement
A qualifying share is one that has been –
• disposed of, or
• deemed to be disposed of under paragraph 12 of the Eighth Schedule.
Disposed of
The expression ‘disposed of’ is not de ned in section 9C or section 1(1). According to the New Shorter Oxford English Dictionary on Historical Principles¶ ‘dispose’ means, amongst other things –
‘3 Bestow, make over; deal out, dispense, distribute.
...
‘11 Get rid of; deal conclusively with, settle; colloq. kill.’
TheFreeDictionary (online) contains the following meanings of ‘dispose of’ appropriate to the context of section 9C:** ‘2. To transfer or part with, as by giving or selling.
* A REIT is a resident company listed on the JSE which meets the JSE listings requirements for listing as a REIT.
† The de nition was substituted by section 7(1)(i) of the Taxation Laws Amendment Act No. 24 of 2011 and came into operation on 1 April 2012 under section 7(4) of that Act.
‡ The de nition was substituted by section 2(1)(z) of the Taxation Laws Amendment Act No. 22 of 2012 with effect from 1 January 2013.
§ Paragraph (f) of the de nition of a ‘company’ in section 1(1).
¶ Lesley Brown 4 ed (1993) Oxford University Press Inc., New York, United States of America in vol 1. ** www.thefreedictionary.com/dispose [Accessed 17 February 2014].
‘[E]quity share’ means any share in a company, excluding any share that, neither as respects dividends nor as respects returns of capital, carries any right to participate beyond a speci ed amount in a distribution;
‘[S]hare’ means, in relation to any company, any unit into which the proprietary interest in that company is divided;
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