Page 435 - SAIT Compendium 2016 Volume2

IN 43 (5) Income Tax acT: InTeRPReTaTIon noTes IN 43 (5)
Ordinary income
Recoupment of opening stock [section 9C(5)] Less: Opening stock [section 22(2)]
Net effect on taxable income
CGT
Proceeds
Less: Base cost Capital gain
100 000 (100 000)
Nil
300 000 (100 000) 200 000
13. Consolidation and subdivision of shares and conversions under sections 40A and 40B [section 9C(8)]
13.1 The law
Section 9C(8)
13.2 Application of the law
Taxpayers are not required to start a new time count for the period of shareholding when –
• shares are consolidated (for example, one class A ordinary share in Company X is received for every ve pre-existing
class A ordinary shares in Company X);
• shares are subdivided (for example, two ordinary shares in Company Y are received in return for every one pre-existing
ordinary share in Company Y);
• a close corporation is converted to a company under section 40A; and
• a co-operative is converted to a company under section 40B
Under section 9C(8) the shares acquired in substitution of the previously held shares take their dates of acquisition from the previously held shares. For the purposes of the Eighth Schedule the events described in section 9C(8) are treated as a non-disposal of an asset under paragraph 11(2)(l).*
(8) For the purposes of this section, where a company issues shares to a person in substitution of previously held shares in that company by reason of a subdivision, consolidation or similar arrangement or a conversion contemplated in section 40A or 40B, such share and such previously held shares shall be deemed to be one and the same share if—
(i) the participation rights and interests of that person in that company remain unaltered; and
(ii) no consideration whatsoever passes directly or indirectly from that person to that company in relation to the
issued shares.
Example 12 – Consolidation of shares acquired on different dates
Facts:
Taxpayer Y acquired the following equity shares in Company Z as trading stock: • 200 ordinary shares acquired on 1 March of year 1
• 100 ordinary shares acquired on 31 December of year 9
On 28 February of year 10 Company Z issues one new ordinary share in substitution for every four pre-existing ordinary shares. Taxpayer Y surrenders the 300 old ordinary shares and receives 75 new ordinary shares. On 15 March of year 10 Taxpayer Y disposes of the 75 new ordinary shares in Company Z.
Result:
50 of the ordinary shares will be deemed to have been acquired on 1 March of year 1, while 25 of the ordinary shares will be deemed to have been acquired on 31 December of year 9. Section 9C will apply only to the 50 shares with a deemed acquisition date of 1 March of year 1.
The section 9C(8) relief will not apply if the substituted shares carry different rights and entitlements to the pre-existing shares or if any consideration passes from the shareholder to the company issuing the shares, whether directly or indirectly. Capitalisation shares are not addressed by section 9C(8). Such shares will simply be acquired on the date of issue at a cost of nil† and the period of holding will run from that date.
14. Insolvency
Shares held as trading stock by a natural person on the date of sequestration are included in closing stock under section 22(1) read with the de nition of a ‘year of assessment’ in section 1(1), section 22(6) and paragraph (b)(i) of the proviso to section 66(13)(a). The inclusion in closing stock applies even if the shares have been held for at least three continuous years on the date of sequestration. Since such shares are not disposed of under the normal meaning of a disposal, section 9C will not apply (see 4.3.2). Consequently, there will be no recoupment under section 9C(5) of opening stock or the ongoing expenditure claimed under section 11(a) during the period that the shares were owned by the taxpayer.
Under section 25C(a), for the purposes of determining any deduction to which the insolvent estate of a natural person is entitled, that person’s estate before sequestration and the insolvent estate are deemed to be one and the same person. It follows that –
• the insolvent estate must account for any opening stock at the same value that the person before sequestration
accounted for it as closing stock; and
* Paragraph 11(2)(l) of the Eighth Schedule is deemed to come into operation on 4 July 2013 and applies to transactions entered into on or after that date.
† Section 40C.
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