Page 437 - SAIT Compendium 2016 Volume2

IN 43 (5) Income Tax acT: InTeRPReTaTIon noTes IN 43 (5)
company [section 42(2)(a)(ii)]. Section 42(2)(a)(ii) overrides this rule for the purposes of section 9C by blocking the date roll-over. The effect is that the date of acquisition of the equity shares issued by the transferee company will be the date of the asset-for-share transaction, except when the asset being transferred comprises equity shares.
This rule prevents the equity shares in the transferee company from immediately becoming capital assets under section 9C(2). Thus, if trading stock such as land held by a developer, which has been held for at least three years, is sold to a company in exchange for shares in that company, any immediate disposal of the shares would not automatically be on capital account. The taxpayer would have to hold the shares for at least three years before section 9C(2) could apply.
The date roll-over under section 42(2)(a)(ii) nevertheless applies to a transfer of equity shares in exchange for an issue of equity shares by the transferee company. The general rule is that in an unbundling transaction the unbundled shares take on the same date of acquisition as the shares in the unbundling company [section 46(3)(a)(ii)]. However, this rule does not apply to the unbundled shares for the purposes of section 9C. Instead, they will for that purpose be regarded as having been acquired on the date of unbundling. This rule prevents an unbundling company (the shares of which had been held for at least three years) from acquiring trading stock, transferring it into a subsidiary, and then unbundling that subsidiary. Had section 46(3)(a)(ii) not been amended to exclude section 9C, the shares in the unbundled subsidiary would have been deemed to have been acquired on the same date as the shares in the unbundling company, thus allowing the shares in the unbundled subsidiary to immediately be disposed of on capital account even though the assets represented by those shares comprise trading stock.
17. Exclusion of shares acquired under employee share incentive plans
Section 8B (under speci ed circumstances) and section 8C recognise gains on shares acquired by virtue of a taxpayer’s employment as being akin to remuneration. In order to preserve this policy objective, section 9C does not apply when determining an income gain under sections 8B and 8C, despite the shares having been held for at least three years.
17.1 Section 8B
Section 8B deals with amounts derived from broad-based employee share plans. An equity share acquired by an employee under such a plan that is held for at least ve years will produce proceeds of a capital nature under section 9C(2) when it is disposed of.
Under section 8B(1) a person must include in income for a year of assessment any gain made by that person during that year from the disposal of any ‘qualifying equity share’ as de ned in section 8B(3) or any right or interest in such a share, which is disposed of by that person within ve years from the date of grant of that share. This income inclusion does not apply when –
• the qualifying equity share is exchanged for another qualifying equity share as contemplated in section 8B(2);
• the person dies or becomes insolvent.
Section 8B(1) applies ‘notwithstanding’ section 9C, thus overriding section 9C. This exclusion from section 9C means that a share falling within section 8B that is disposed of between three and ve years after the date of grant of that share will still result in an income inclusion despite section 9C. The three exclusions in section 8B(1)(a) to (c) do not have any impact on section 9C because none of the events listed results in a disposal of the shares for purposes of section 9C. Section 8B(2) provides roll-over treatment (that is, the replacement shares are deemed to be acquired on the same date as the previously held shares), while shares held as trading stock are accounted for as closing stock on date of death (see 15) or date of sequestration (see 14).
Section 9C will, however, apply once the share has been held for ve years and the period for an income inclusion under section 8B has elapsed.
17.2 Section 8C
Section 8C(1) provides for an inclusion in income when an ‘equity instrument’ as de ned in section 8C(7) ‘vests’ in an employee or director (that is, becomes unrestricted). The income inclusion applies ‘notwithstanding’ section 9C, meaning that a share that vests three years or longer after it was acquired will still produce an income inclusion upon vesting despite section 9C. Once such a share has become unrestricted, section 9C will apply to a subsequent disposal of the share provided it has been held for at least three years. The date of acquisition for purposes of section 9C will be the date when the taxpayer became the owner of the share. This date is a question of fact and will depend on the terms of the particular share plan.
The base cost of the vested share is determined under paragraph 20(1)(h)(i) of the Eighth Schedule, which provides that it is equal to the market value of the share or the amount received or accrued upon its disposal, as the case may be, that was taken into account in determining the amount of the income gain or loss (including a situation in which the gain and loss so determined was nil) under section 8C. By granting a step-up in base cost paragraph 20(1)(h)(i) prevents double taxation, that is, it avoids subjecting the income gain under section 8C to CGT.
18. Conclusion
Section 9C provides taxpayers with certainty that if they hold equity shares for at least three continuous years the gains and losses on disposal will be of a capital nature regardless of the intention with which the shares were originally acquired. Not all types of shares qualify under section 9C; for example, non-participating preference shares, shares in foreign companies (other than JSE-listed shares) and participatory interests in portfolios of collective investment schemes in property fall outside section 9C. Its provisions are now mandatory and no election is required or even possible. The wider ambit of section 9C has necessitated the inclusion of a number of anti-avoidance measures. The capital or revenue nature of shares disposed of within three years of acquisition will continue to be determined according to principles laid down by case law.
Section 9C came into operation on 1 October 2007 and applies to the disposal of qualifying shares on or after that date. saIT comPendIum oF Tax LegIsLaTIon VoLume 2 429