Page 430 - SAIT Compendium 2016 Volume2

IN 43 (5) Income Tax acT: InTeRPReTaTIon noTes IN 43 (5)
22(4A) and (9)] and capital gains tax (paragraph 11(2)(h) of the Eighth Schedule). For the purpose of determining the three-year continuous holding period under the de nition of a ‘qualifying share’ in section 9C(1), the lender is deemed to have enjoyed uninterrupted ownership of the shares during the lending period. More speci cally,
• a share lent under a securities lending arrangement is deemed not to be a disposal in the hands of the lender [section
9C(4)(a)]; and
• a share of the same kind and same or equivalent quantity and quality returned by the borrower as a replacement for
the share originally borrowed is deemed to be one and the same share in the hands of the lender [section 9C(4)(b)].
In order to qualify as a ‘securities lending arrangement’, the borrower must, amongst other things, return the securities (qualifying shares in this context) to the lender before the expiry of a 12-month period from the date the securities were
initially transferred from the lender to the borrower.
Example 5 – Securities-lending arrangement resulting in deemed uninterrupted ownership
Facts:
On 2 January of year 1 Company A acquired 20 000 class B equity shares in Listco. On 1 June of year 2 Company A lent the 20 000 Listco shares to Company B under a securities lending arrangement. Company B gave Company A collateral in the form of cash, government securities and a letter of credit and undertook to compensate Company A for any distributions from the Listco shares that Company A would have been entitled to receive during the lending period had the arrangement not been entered into. On 30 May of year 3, Company B returned 20 000 class B equity shares in Listco to Company A. On 3 January of year 4 Company A disposed of the 20 000 Listco shares.
Result:
The lending arrangement will not be deemed to be a disposal of shares because the transaction quali es as a ‘securities lending arrangement’ as de ned in section 1(1), that is, the shares were returned within 12 months from the date of transfer to the borrower and are of the same kind and quality and Company B is contractually bound to compensate Company A for any distributions received during the lending period. Company A is accordingly regarded as having held the shares for an uninterrupted period of at least three years and the amount received or accrued on disposal of the shares on 3 January of year 4 is deemed to be of a capital nature under section 9C(2).
9. Recoupment of expenditure or losses [section 9C(5)] 9.1 The law
Section 9C(5)
9.2 Application of the law
Under section 9C(5) any expenditure or losses allowed as a deduction to a taxpayer in respect of a qualifying share under section 11, must be recouped in the hands of the taxpayer in the year of assessment in which the share is disposed of. This recoupment also includes any reduction in the cost price of a share allowed under section 22(1)(a) read with section 11(x) in determining the value of trading stock held at the end of a year of assessment. Section 11(x) allows as a deduction –
‘any amounts which in terms of any other provision in this Part, are allowed to be deducted from the income of the taxpayer’.
‘This Part’ refers to Part I (Normal Tax) of Chapter II (The Taxes), covering sections 5 to 37H, and thus includes any write-down of a qualifying share by a natural person or trust under section 22(1)(a) during years of assessment commencing before 1 January 2011. For years of assessment commencing before 1 January 2011 section 22(1)(a) allowed natural persons and trusts to write down the cost price of shares held as closing stock if their value fell below cost. This deduction did not apply to shares held by any company in any other company. With effect from years of assessment commencing on or after 1 January 2011, it is no longer possible for any taxpayer to claim a deduction for the write-down of a nancial instrument. The recoupment under section 9C(5) will accordingly cover any write-down by a natural person or trust of a share or a participatory interest in a collective investment scheme in securities during years of assessment commencing before 1 January 2011.
The amount of the deemed recoupment is made with reference to the amounts previously allowed as a deduction against income, and bears no relationship to any amount derived on disposal of the share. Thus, even if a share is disposed of at a capital loss, the recoupment remains unaffected.
Section 9C(5) does not apply to the extent that the expenditure or loss has been taken into account under section 8(4)(a) or section 19. The purpose of this exclusion is to prevent double taxation when the debt used to nance the purchase of the qualifying shares is wholly or partially waived. Such a waiver results in a reduction of the value of trading stock, and to the extent that the waiver exceeds that value the excess is included in the taxpayer’s income under section 8(4)(a).
(5) There shall in the year of assessment in which any qualifying share is disposed of by the taxpayer be included in the taxpayer’s income any expenditure or losses incurred in respect of such qualifying share and allowed as a deduction from the income of the taxpayer during that or any previous year of assessment in terms of section 11: Provided that this subsection must not apply in respect of any expenditure or loss to the extent that the amount of that expenditure or loss is taken into account in terms of section 8(4)(a) or section 19.
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