Page 425 - SAIT Compendium 2016 Volume2

IN 43 (5) Income Tax acT: InTeRPReTaTIon noTes IN 43 (5)
4.3.4 Partnerships
Under South African law a partnership is not a separate legal persona distinct from its members.* Should a partnership acquire shares, the continuous three-year holding period applies to the individual partners and not the partnership. In other words, the date of acquisition of a share by a partner held in partnership occurs when that partner acquires a fractional interest in the share.
4.3.5 Trusts and their bene ciaries
Section 9C(2) applies to shares held by a discretionary trust. The trust’s continuous three-year holding period is measured from the date of acquisition of the share until the date on which it is disposed of. Typically, the trust will dispose of its shares by selling them to a third party or by vesting them in a bene ciary. A bene ciary’s three-year holding period is measured from the date of vesting (the date of acquisition of the share by the bene ciary) until the date on which the bene ciary disposes of the share.
A bewind is a type of trust under which the bene ciaries remain the owners of the trust assets and the trustee acts merely as an administrator of those assets. Accordingly, the transfer of administrative control of equity shares by a bene ciary to a bewind will not interrupt the bene ciary’s continuous holding period for the purposes of section 9C.
4.3.6 Non-residents
The amount received by or accrued to a non-resident from the disposal of an equity share will be included in gross income only if the amount is neither of a capital nature nor deemed to be of a capital nature and is derived from a source within South Africa. Thus if a non-resident trades in shares on the JSE it will rst be necessary to determine the source of the amounts derived on disposal of the shares. If the amounts are from a source outside South Africa section 9C will not apply. In determining the source of income derived from the disposal of shares, South African courts have considered it to be the place where the share-dealing business is being carried on. This source may be where the capital is employed or where the taxpayer’s wits and labour are exercised.
In Overseas Trust Corporation Ltd v CIR† the appellant carried on a business in South Africa of buying and selling shares and other securities. The company sold certain shares through brokers in Germany. The brokers received instructions from Cape Town to nd buyers and to sell the shares at a certain price. The share certi cates were forwarded to the German brokers. The court found that the company had acquired the shares in South Africa where its capital was employed and that it did not carry on a business in Germany. The transactions were fully controlled from South Africa and the brokers were merely agents of the appellant acting on its instructions. Accordingly the pro t was held to be from a source within South Africa.
In CIR v Black‡ the taxpayer, a Johannesburg-based stockbroker, carried on a business of buying and selling shares through a London broker. The broker was entitled to deal in shares without consulting the taxpayer. The court held that the source of the pro ts was in London because that was where a distinct business of buying and selling shares was being carried on.
In ITC 1779§ the appellant, a South African resident based in Cape Town, carried on a part-time business of dealing in foreign exchange. Although the taxpayer deposited certain funds in the United States of America with the organisation through which he conducted his activities, the court held that he exercised his wits and labour in South Africa, and it was therefore in South Africa that he carried on his business.
Although the above cases involved residents, the same principles can be applied to a non-resident carrying on share- dealing activities in South Africa. Thus, section 9C will apply to a non-resident carrying on a share-dealing business by employing his or her capital or wits and labour in South Africa. Any pro ts or losses on disposal of shares forming part of the trading stock of that business will be derived from a source in South Africa. Once the shares have been held for a continuous period of at least three years any proceeds on disposal of the shares will be of a capital nature. In order to be subject to CGT the qualifying shares would either have to be attributable to a permanent establishment in South Africa [paragraph 2(1)(b)(ii) of the Eighth Schedule] or represent ‘immovable property’ as de ned in paragraph 2(2) of the Eighth Schedule.
4.3.7 Exclusions – overview
A ‘qualifying share’ as de ned in section 9C(1) speci cally excludes –
• shares in share block companies;
• shares in a company which was not a resident, other than a company listed on the JSE; or • a ‘hybrid equity instrument’ as de ned in section 8E.
A share will be disquali ed from section 9C if at any time during the continuous three-year period preceding its disposal, the share constituted any of the above-mentioned excluded shares.
4.3.8 Exclusion – shares in a share block company
The main object of a share block company is to operate a share block scheme in respect of immovable property owned by it. A person that owns a share in a share block company is entitled to use and occupy a speci c unit or portion of the immovable property owned by the share block company. Shares in a share block company are excluded from the de nition of a ‘qualifying share’ because these types of investments are normally held on capital account.
* Chipkin (Natal) (Pty) Ltd v C: SARS 2005 (5) SA 566 (SCA), 67 SATC 243 † 1926 AD 444, 2 SATC 71.
‡ 1957 (3) SA 536 (a), 21 SATC 226.
§ (2004) 66 SATC 353 (c).
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