Page 590 - SAIT Compendium 2016 Volume2

IN 67 (2) Income Tax acT: InTeRPReTaTIon noTes IN 67 (2)
A South African partnership is not an entity to which the law attributes legal personality.* The Act also excludes foreign partnerships from the de nition of a ‘person’. Partners are usually co-owners of shares held by a partnership. In such a case the look-through principle is applied and the shareholding of the individuals is assessed in order to determine their individual shareholding. Under paragraph (c)(i) partners are connected persons in relation to each other and as a result the other partners’ shareholdings will need to be taken into account when determining the shareholding a partner jointly holds with a connected person.
Having regard to the purpose of paragraph (d)(iv), the word ‘jointly’ is used in paragraph (d)(iv) in the sense of ‘together’ or ‘in combination’ and not in the restricted sense of an undivided share held in co-ownership. In other words the individual holdings of all connected persons must be aggregated to determine whether a particular connected person meets the 20% threshold in relation to the company being examined.
The words ‘directly or indirectly’ mean that indirect holdings must be taken into account in determining whether the 20% threshold has been attained. An indirect holding is determined by ascertaining the effective interest, namely, by multiplying the respective percentage holdings in the chain together. For example, if Individual X owns 20% of Company A and Company A owns 20% of Company B then Individual X has an indirect interest of 20% × 20% = 4% in Company B.
Example 16 – Connected person in relation to a company
Facts:
ABC CC and A, who is the member of ABC CC, each hold 10% of the equity shares in XYZ (Pty) Ltd. Are ABC CC and A connected persons in relation to XYZ (Pty) Ltd?
Result:
ABC CC and A are connected persons in relation to each other under paragraph (d)(vi)(aa) and paragraph (e) (see 3.5.6 and 3.6). ABC CC and A are connected persons in relation to XYZ (Pty) Ltd under paragraph (d)(iv)(aa) as they jointly hold 20% of the equity shares in XYZ (Pty) Ltd.
Example 17 – Connected person in relation to a company
Facts:
ABC Family Trust and A, who is the bene ciary of ABC Family Trust, each hold 10% of the equity shares in XYZ (Pty) Ltd. Are ABC Family Trust and A connected persons in relation to XYZ (Pty) Ltd?
Result:
ABC Family Trust and A are connected persons in relation to each other under paragraph (a)(ii) and paragraph (b)(i) (see 3.1.3 and 3.2.2) and they jointly hold 20% of the equity shares in XYZ (Pty) Ltd. ABC Family Trust and A are therefore connected persons in relation to XYZ (Pty) Ltd under paragraph (d)(iv)(aa).
Example 18 – Connected person in relation to a company
Facts:
D and E are members of DE Partnership. Under the partnership agreement D is entitled to 1% and E to 99% of the pro ts of the partnership. DE Partnership holds 100% of the equity shares in DEF (Pty) Ltd. Are D and E connected persons in relation to DEF (Pty) Ltd?
Result:
D and E are the members of DE Partnership and are therefore connected persons in relation to each other under paragraph (c)(i) (see 3.4.2). D and E jointly hold 100% of the equity shares in DEF (Pty) Ltd and are therefore connected persons in relation to DEF (Pty) Ltd under paragraph (d)(iv)(aa).
Example 19 – Connected person in relation to a company
Facts:
X, an individual, holds 100% of the member’s interest in XYZ CC and XYZ CC holds 20% of the equity shares in DEF (Pty) Ltd. Are X and XYZ CC connected persons in relation to DEF (Pty) Ltd?
Result:
X indirectly holds 20% (100% × 20%) of the equity shares in DEF (Pty) Ltd and is therefore a connected person in relation to DEF (Pty) Ltd under paragraph (d)(iv). XYZ CC directly holds 20% of the equity shares in DEF (Pty) Ltd and is also a connected person in relation to DEF (Pty) Ltd under paragraph (d)(iv).
Example 20 – Connected person in relation to a company
Facts:
D, an individual, holds 20% of the equity shares in ABC (Pty) Ltd and ABC (Pty) Ltd holds 20% of the equity shares in DEF (Pty) Ltd. Both ABC (Pty) Ltd and DEF (Pty) Ltd are incorporated under the Companies Act. Are D and ABC (Pty) Ltd connected persons in relation to DEF (Pty) Ltd?
* Michalow, NO v Premier Milling Co Ltd 1960 (2) SA 59 (w) at 61.
582 saIT comPendIum oF Tax LegIsLaTIon VoLume 2