Page 427 - SAIT Compendium 2016 Volume2

IN 43 (5) Income Tax acT: InTeRPReTaTIon noTes IN 43 (5) Section 12J(2)
6.2 Application of the law
Section 12J was inserted into the Act by section 27(1) of the Revenue Laws Amendment Act No 60 of 2008 with effect from 1 July 2009. The section was substantially amended by the Taxation Laws Amendment Act No. 24 of 2011, with most of the amendments applying to years of assessment commencing on or after 1 January 2012.
The deduction under section 12J(2) read with section 12J(3), (3A) and (4) covers only the acquisition of newly issued shares, in other words the deduction does not apply to secondary trading in VCC shares. No deduction will be granted under section 12J for VCC shares acquired after 30 June 2021.*
Any amount allowed as a deduction under section 12J(2) is recouped under section 8(4)(a) upon the disposal of shares held in an approved VCC. Any amount recouped under section 8(4)(a) is automatically included in the gross income of the person disposing of the shares, irrespective of the capital or revenue nature thereof.
Under section 9C(2A) an amount received or accrued on or after 1 July 2009 for the sale of shares in an approved VCC that is recouped under section 8(4)(a) will not be deemed to be of a capital nature under section 9C(2). Any amount received or accrued in excess of the amount recouped under section 8(4)(a) will, however, be deemed to be of a capital nature under section 9C(2) provided that the shares have been held for at least three continuous years.
(2) Subject to subsections (3), (3A) and (4), there must be allowed as a deduction from the income of a taxpayer expenditure actually incurred by that taxpayer in acquiring any venture capital share issued to that taxpayer by a venture capital company.
Example 1 – Application of section 9C(2A) to disposal of VCC shares
Facts:
Company A, which has a nancial year that ends on 31 December, acquires shares in an approved VCC on 1 January 2013 for R400 000. On 30 September 2016 Company A sells the shares for R900 000.
Result:
Income tax consequences
2013 year of assessment
Company A quali es for a deduction of R400 000 under section 12J(2).
2016 year of assessment
Upon the disposal of the shares R400 000 is recouped under section 8(4)(a) [that is, the amount previously allowed as a deduction under section 12J(2)]. The amount deemed to be of a capital nature under section 9C is equal to the amount received or accrued in excess of the amount recouped under section 8(4)(a), namely, R500 000 (R900 000 –
R400 000). This amount is subject to CGT.
CGT consequences
Amount received or accrued
Less: Amount recouped under section 8(4)(a) (400 000) Proceeds
Less: Base cost
Cost
Less: Deduction under section 12J(2) Capital gain
Taxable capital gain (66,6%† of R500 000)
R 900 000 500 000
(Nil) 400 000
(400 000)
500 000
333 000
7. Anti-avoidance measures applying to Immovable property and bare dominium schemes [section 9C(3)]†
7.1 The law
(3) The provisions of this section shall not apply to any qualifying share if at the time of the disposal of that share the taxpayer was a connected person in relation to the company that issued that share and—
(a) more than 50 per cent of the market value of the equity shares of that company was attributable directly or indirectly to immovable property other than—
(i) immovable property held directly or indirectly by a person that is not a connected person to the taxpayer; or (ii) immovable property held directly or indirectly for a continuous period of more than three years immediately
prior to that disposal; or
(b) that company acquired any asset during the period of three years immediately prior to that disposal and amounts were paid or payable by any person to any person other than that company for the use of that asset while that asset was held by that company during that period.
7.2 Application of the law
The effective CGT rate is lower than the effective rate at which other income of a revenue nature is subject to income tax. The potential abuse of section 9C necessitated the introduction of anti-avoidance provisions in order to prevent speculators in immovable property from converting their revenue pro ts into capital pro ts.
* Section 12J(11).
† Assumed inclusion for years of assessment commencing on or after 1 March 2012.
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