Page 433 - SAIT Compendium 2016 Volume2

IN 43 (5) Income Tax acT: InTeRPReTaTIon noTes IN 43 (5)
the generation of that recoupment and cannot increase its quantum. The expenses incurred after year 3 can therefore only generate a future receipt or accrual of a capital nature and are disquali ed from deduction under section 23(f).
In the year of disposal of qualifying shares a share-dealer must include in income under section 9C(5) the value of those shares included in opening stock and any other expenses pertaining to them which have been claimed as a deduction for income tax purposes in that year or any previous year of assessment.
Some of these recouped expenses will form part of the base cost of the qualifying shares for CGT purposes, provided that they meet the requirements of paragraph 20 of the Eighth Schedule. Normally an amount which has been allowed as a deduction against income will not form part of the base cost of an asset, even if that amount has been recouped, because paragraph 20(3)(a) of the Eighth Schedule eliminates such amounts from base cost in order to prevent double deductions. However, paragraph 20(3)(a)(ii) excludes from this base cost reduction rule amounts recouped under section 9C(5). Not all amounts subject to recoupment under section 9C(5) will qualify to form part of the base cost of qualifying shares. For example, the interest incurred on amounts borrowed to fund the acquisition of shares listed on a recognised exchange or a participatory interest in a portfolio of a collective investment scheme must be reduced by two-thirds under paragraph 20(1)(g) of the Eighth Schedule. While paragraph 20(1)(c)(i) of the Eighth Schedule allows broker’s costs directly related to the acquisition or disposal of an asset, no provision is made for the inclusion of portfolio management fees in base cost.
A share-dealer may have dif culty in determining which expenses relate to –
• taxable income derived from share-dealing operations of qualifying shares;
• taxable income derived from share-dealing operations of non-qualifying shares; and • exempt dividends.
In most cases the expenses would be incurred in the production of all the above. The Act does not prescribe a method of apportionment. Accordingly, any apportionment of expenditure must be made on a logical, fair and reasonable basis taking into account the facts and circumstances of the particular case.*
A ‘return of capital’ as de ned in section 1(1) constitutes gross income in the hands of a share-dealer, even if received or accrued after the shares have been held for at least three continuous years. Section 9C(2) cannot apply to such an amount because a share becomes a ‘qualifying share’ only once it has been disposed of. In these circumstances the de nition of ‘gross income’ in section 1(1) takes precedence with the result that the amount would not also have to be accounted for as a reduction in base cost under paragraph 76B of the Eighth Schedule.†
11. ‘First-in- rst-out’ method [section 9C(6)] 11.1 The law
Section 9C(6)
11.2 Application of the law
Section 9C(6) deals with the situation in which a taxpayer has acquired identical shares in the same company on various dates and disposes of some of them. It then becomes necessary to identify which shares have been disposed of in order to determine whether they have been held for the qualifying three-year period. For this purpose section 9C(6) prescribes the ‘ rst-in- rst-out’ method.
This rule is not in con ict with the identi cation rules under paragraph 32 of the Eighth Schedule used for CGT purposes for determining the base cost of identical assets. Paragraph 32 permits the use of the speci c-identi cation method, the ‘ rst-in- rst-out’ method or the weighted-average method. While it is appreciated that two different identi cation rules may apply for the same set of shares, the rules serve different purposes and need not be aligned. The identi cation rules in the Eighth Schedule are used for purposes of determining the base cost of shares for CGT purposes while the section 9C identi cation rule is used only for purposes of determining the holding period of shares that have been disposed of. On the question of non-alignment, while CGT allows for the weighted-average method in calculating the base cost of shares, this method cannot be applied for purposes of determining the time period for which shares were held because it disregards speci c dates of acquisition and disposal. Consequently it will be necessary for a taxpayer who uses the speci c-identi cation method or the weighted-average method to determine the base cost of shares for CGT purposes to also maintain a record of purchases and sales of shares on the ‘ rst-in- rst-out’ method in order to apply section 9C.
* See SIR v Guardian Assurance Holdings (SA) Ltd 1976 (4) SA 522 (a), 38 SATC 111 at 126 and CIR v Nemojim 1983 (4) SA 935 (a), 45 SATC 241 at 260.
† There is a necessary implication against double taxation in the Act (CIR v Delfos 1933 AD 242, 6 SATC 92 at 112). saIT comPendIum oF Tax LegIsLaTIon VoLume 2 425
(6) Where the taxpayer holds identical shares in the same company which were acquired by the taxpayer on different dates and the taxpayer has disposed of any of those shares, the taxpayer shall for the purposes of this section be deemed to have disposed of the shares held by the taxpayer for the longest period of time
Example 10 – Application of the ‘ rst-in- rst-out’ method
Facts:
Company X acquires shares in listed Company Z as trading stock in the following sequence: • 1 February of year 1: 20 000 shares @ R185 per share
• 1 January of year 2: 10 000 shares @ R120 per share
• 1 February of year 4: 15 000 shares @ R205 per share
On 1 March of year 4 Company X sold 15 000 shares @ R220 per share.