Page 426 - SAIT Compendium 2016 Volume2

IN 43 (5) Income Tax acT: InTeRPReTaTIon noTes IN 43 (5)
4.3.9 Exclusion – shares in non-resident companies that are not listed in South Africa
Paragraph (b) of the de nition of a ‘qualifying share’ in section 9C(1) excludes a share in a company which was not a resident, other than a company contemplated in paragraph (a) of the de nition of a ‘listed company’ in section 1(1). Paragraph (a) of the de nition of a ‘listed company’ refers to –
‘an exchange as de ned in section 1 of the Financial Markets Act and licensed under section 9 of that Act’.
Thus, an equity share in a non-resident company will be a ‘qualifying share’ only if it is listed on an exchange in South Africa. Examples of non-resident companies whose shares are listed on the JSE and thus comprise ‘qualifying shares’ include Anglo American plc, BHP Billiton plc, British American Tobacco plc, Investec plc, Old Mutual plc and SABMiller plc.
The exclusion of shares in non-resident companies (other than those listed on the JSE) from the de nition of a ‘qualifying share’ is justi ed in that for tax purposes foreign shares are treated differently to local shares. For example, a capital gain or loss on disposal of 10% or more of the shares in a foreign company to a non-resident is excluded from CGT under the participation exemption in paragraph 64B of the Eighth Schedule while local shares can only bene t from being taxed at the reduced CGT effective rate.
4.3.10 Exclusion – hybrid equity instruments
Any ‘hybrid equity instrument’ as de ned in section 8E is speci cally excluded from being classi ed as a qualifying share because its participation rights (similar to a non-participating preference share) are effectively limited and it is in many ways more akin to debt than pure equity.
5. Amounts deemed to be of a capital nature [section 9C(2)] 5.1 The law
Section 9C(2)
5.2 Application of the law
5.2.1 Amount received or accrued on disposal of qualifying shares deemed to be of a capital nature
Section 9C(2) deems any amount (other than a dividend or foreign dividend) received or accrued in respect of a ‘qualifying share’ to be of a capital nature. Shares which were accounted for as trading stock under section 22 during the three years after their acquisition must nevertheless continue to be accounted for as trading stock until they are disposed of (see 10). At the time of disposal any expenditure previously allowed as a deduction (including the value of opening stock) will be included in income as a recoupment under section 9C(5) (see 9). The qualifying portion of such recouped expenditure will then form part of the base cost of the shares for the purposes of determining a capital gain or loss under the Eighth Schedule (see 10).
As a result of the introduction of dividends tax on 1 April 2012 the terms ‘dividend’ and ‘foreign dividend’ are now separately de ned in section 1(1). Any dividend or foreign dividend received by or accrued to a person in respect of a qualifying share is speci cally excluded from section 9C(2). Such an excluded dividend is one that coincides with, or is derived after, the disposal of a share, since a qualifying share is by de nition one that has been disposed of. Examples include dividends –
• received or accrued upon a share buy-back;
• received or accrued as part of a nal liquidation dividend; and
• received by or accruing to a seller after the disposal of a share, that is, the sale of a share ‘ex dividend’.
Since a dividend and a foreign dividend are included in gross income under either the opening words of the de nition of the term ‘gross income’ in section 1(1), or through paragraph (k) of the special inclusions to that de nition, which apply whether an amount is of a capital nature or not, their exclusion from section 9C(2) is technically unnecessary. Nevertheless, their exclusion from being deemed to be of a capital nature does emphasise that such dividends and foreign dividends do remain gross income, and hence will not form part of proceeds for CGT purposes.
5.2.2 Mandatory application and impact on gains and losses
Proceeds in respect of a share ful lling the requirements of section 9C will automatically be on capital account, even if the taxpayer held the shares as trading stock. This result applies to both gains and losses. Thus a share-dealer is unable to elect out of section 9C in order to claim losses on disposal of qualifying shares on revenue account.
5.2.3 Shares disposed of within three years
Section 9C(2) does not regulate the capital or revenue nature of shares disposed of within three years. Whether the disposal of a particular share is on capital or revenue account will depend on the facts and circumstances of the particular case and the application of principles laid down by case law (see 2.1).
6. Venture capital company (VCC) shares [section 9C(2A)] 6.1 The law
Section 9C(2A)
(2) Any amount other than a dividend or foreign dividend received by or accrued to a taxpayer in respect of a qualifying share shall be deemed to be of a capital nature.
(2A) Subsection (2) does not apply in respect of so much of the amount received or accrued in respect of the disposal of a qualifying share contemplated in that subsection as does not exceed the expenditure allowed in respect of that share in terms of section 12J(2).
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