Page 434 - SAIT Compendium 2016 Volume2

IN 43 (5) Income Tax acT: InTeRPReTaTIon noTes IN 43 (5)
On 1 April of year 4 Company X sold 10 000 shares @ R230 per share.
Company X adopts the speci c-identi cation method for income tax and CGT purposes and nominates the shares with the highest cost or base cost to have been disposed of.
Result:
Disposal – 1 March of year 4
Under section 9C(6) the 15 000 shares sold are deemed to be sourced from the 20 000 shares acquired on 1 February of year 1. More than three continuous years have passed from that date, and the consideration received or accrued is therefore deemed to be of a capital nature under section 9C(2).
For the purposes of determining the base cost of the shares disposed of, the taxpayer would nominate the shares to have been acquired on 1 February of year 4 at a cost of R205 per share, since this will result in the highest base cost. In other words, section 9C(6) merely determines whether the proceeds on disposal of the shares are of a capital nature. The taxpayer is not bound by section 9C(6) for the purpose of determining its cost or base cost.
Capital gain = (R220 – R205) × 15 000 = R225 000
Disposal – 1 April of year 4
Of the 10 000 shares disposed of, 5 000 are for the purposes of section 9C deemed under section 9C(6) to be from the shares acquired on 1 February of year 1. These shares are therefore deemed to be disposed of on capital account under section 9C(2). After applying the ‘ rst-in- rst-out’ method, all remaining shares have been held for less than three years. Those remaining shares will be on revenue account because according to the facts they were acquired as trading stock.
For cost or base cost purposes, the company has already regarded the 15 000 shares acquired on 1 February of year 4 as having been disposed of on 1 March of year 4. The shares still on hand for cost-identi cation purposes with the next highest cost are the 20 000 shares acquired on 1 February of year 1 at R185 per share.
CGT
Proceeds (5 000 × R230)
Less: Base cost (5 000 × R185) Capital gain
Ordinary income
Amount received or accrued (5 000 × R230) Less: Cost of sales (5 000 × R185) Inclusion in taxable income
1 150 000 (925 000)
225 000
1 150 000 (925 000)
225 000
12. Suspension of section 22(8) on shares ceasing to be held as trading stock [section 9C(7)]
12.1 The law Section 9C(7)
12.2 Application of the law
Section 22(8) provides for a deemed inclusion in income when trading stock is applied in a manner other than by way of an arm’s length sale. For example, this deemed inclusion would apply if shares were donated, disposed of other than in the ordinary course of trade for a consideration less than market value or distributed in specie.*
Section 9C(7) prevents the application of section 22(8) upon disposal of a qualifying share, thus ensuring that any consideration (including any deemed consideration) will be on capital account.
(7) The provisions of section 22(8) shall not apply as a result of the disposal of any qualifying share.
Example 11 – Exclusion of application of section 22(8) by section 9C(7)
Facts:
On 1 February of year 1, Company A acquired 100 equity shares in Listco for R100 000, which it held as trading stock. On 1 March of year 5, Company A distributed the 100 Listco shares as a dividend in specie when their market value was R300 000.
Result [in the absence of section 9C(7)]:
In the absence of section 9C(7) a deemed disposal of trading stock at market value would be triggered on 1 March of year 5 under section 22(8)(b)(iii). Company A would thus have had a net inclusion in taxable income of R200 000 determined as follows:
Inclusion in income [section 22(8)(b)(iii)]
Less: Opening stock [section 22(2)]
Taxable income
Result [applying section 9C(7)]:
300 000 (100 000) 200 000
* See Interpretation Note No. 65 (Issue 2) dated 5 February 2014 ‘Trading Stock – Inclusion in Income when Applied, Distributed or Disposed of Otherwise than in the Ordinary Course of Trade’
426 saIT comPendIum oF Tax LegIsLaTIon VoLume 2