Page 428 - SAIT Compendium 2016 Volume2

IN 43 (5) Income Tax acT: InTeRPReTaTIon noTes IN 43 (5)
In the absence of section 9C(3) a person could buy immovable property and place it in a company or close corporation in which that person has held the shares or member’s interest for at least three continuous years. The shares or member’s interest could then be disposed of and the amount received or accrued on disposal of the shares or member’s interest would have been deemed to be of a capital nature under section 9C(2).
Section 9C will not apply if the requirements of section 9C(3) are met. In such event, the capital or revenue nature of the amount derived on disposal of the shares must be determined by applying the general principles laid down by the South African tax courts.
Before section 9C(3)(a) or (b) can be applied, the taxpayer must be a connected person in relation to the company that issued the shares at the time of their disposal. On the extended meaning of a ‘connected person’ see 4.2.
7.2.1 Companies holding immovable property
For section 9C(3)(a) to apply, more than 50% of the market value of the equity shares being disposed of must be directly or indirectly attributable to ‘tainted’ immovable property. The words ‘immovable property’ are not de ned for the purposes of section 9C(3), but under Roman-Dutch law include land, buildings with foundations in the soil, trees, growing crops, real rights over immovable property (for example, a registered usufruct, a registered lease of not less than ten years, old and new order mineral rights, a registered praedial servitude and building restrictions).
The reference to the value of the equity shares being indirectly attributable to immovable property would include, for example, a situation in which the company holds shares in another company which holds immovable property, or when the company is a lessee under a non-registered lease. In the latter case the lease right, which is not itself immovable property, derives its value from the immovable property of the lessor.
The words ‘market value’ are neither de ned in section 9C nor in section 1(1) and must accordingly be given their ordinary meaning for purposes of interpreting section 9C. The International Valuation Standards* de ne ‘market value’ as –
‘the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion’.
In determining whether more than 50% of the market value of shares in a company is directly or indirectly attributable to immovable property, any liabilities in the company must be disregarded. In other words, the determination is made on the basis of the market value of the tainted immovable property compared to the market value of all assets, and not on the basis of net asset values. This interpretation is consistent with SARS’s interpretation of paragraph 2(2) of the Eighth Schedule and the OECD’s interpretation of article 13(4) of the OECD model tax treaty, both of which contain similar wording.†
Certain types of ‘untainted’ immovable property are excluded as immovable property for the purposes of section 9C(3)(a), namely, immovable property held directly or indirectly –
• by a person that is not a connected person to the taxpayer; or
• for more than three continuous years immediately before that disposal.
An example of the rst bullet point above could arise if the company is a lessee under a non-registered lease and the shareholder of that company is not a connected person in relation to the lessor.
Example 2 – Company holding tainted immovable property [section 9C(3)(a)]
Facts:
In year 1 X acquired all the equity shares of several shelf companies. In year 5, X provided one of these companies, Propco, with a guarantee so that it could acquire a block of ats. Bank Y provided Propco with a mortgage bond to nance the acquisition of the ats. Six months after Propco acquired the ats X sold the shares in Propco.
Result:
X is a connected person in relation to Propco. More than 50% of the market value of X’s shares in Propco is directly attributable to immovable property. The immovable property is tainted because it has been held for less than three consecutive years. Section 9C(2) will not apply when X disposes of the shares in Propco. The capital or revenue nature of the amount derived on disposal of the Propco shares must be determined by applying the principles laid down by case law.
* IVS 1 – Market Value Basis of Valuation, Seventh Edition.
† See Comprehensive Guide to CGT (Issue 4) in 4.2 and the commentary on the OECD’s ‘Model Tax Convention on Income and on Capital’ 8 ed (22 July 2010) condensed version in para 28.4.
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