Page 88 - SAIT Compendium 2016 Volume2

PN 2/1996 Income Tax acT: PracTIce noTes PN 2/1996
‘A’ represents the disallowable interest, limited to interest incurred during such year in respect of nancial assistance granted on or after 19 July 1995;
‘B’ represents the total interest incurred during such year in respect of all nancial assistance, contemplated in subsection (3), in existence during such year (whether or not such nancial assistance was granted before, on or after 19 July 1995); ‘C’ represents the weighted average of all interest-bearing nancial assistance which was in existence during such year (whether or not such assistance was granted before, on or after 19 July 1995); and
‘D’ represents the greater of—
– three times the xed capital of the resident or recipient as at the end of the relevant year of assessment; and
– the weighted average of all interest-bearing nancial assistance granted prior to 19 July 1995, which existed during
such year.
4.2 The nancial assistance contemplated in section 31 to be used in symbol C is an amount equal to the weighted average
of the nancial assistance in existence during the relevant year of assessment and includes interest-bearing anancial assistance only. Where no signi cant variation occurred in the level of nancial assistance during the year of assessment, the amount of nancial assistance as it exists at the end of the relevant year of assessment may be used. Trade credit which is interest-bearing must be included in the amount of nancial assistance granted as contemplated in section 31 (1).
Furthermore, where a South African company is partially owned by an investor (e g 50%) and such investor is jointly and severally, together with all other shareholders, liable in terms of a security provided in respect of—
– a foreign bank overdraft of the South African company; or
– any other independent third party foreign loan to the South African company,
a portion of the overdraft or loan, pro rata to the investor’s interest in the company, will be regarded as nancial assistance granted by such investor.
4.3 In determining the amount of xed capital of the resident or recipient in the Republic, the following items are to be taken into account on a pro rata basis in accordance with the investors’ interest in the South African entity:
– – – –
share capital
share premium
accumulated pro ts of a capital and revenue nature; and
permanent owners’ capital (excluding any nancial assistance) in circumstances where there is no share capital.
Fixed capital will be reduced by any reserves and increased by any losses, resulting from the revaluation of assets. The amount of xed capital to be used when calculating symbol ‘D’ of the formula is an amount equal to the xed capital at the end of the relevant year of assessment. However, the annual net trading losses sustained during the current and immediately preceding two years of assessment, limited to losses sustained for years of assessment during which the investor has granted nancial assistance to the resident or recipient, may be added back to xed capital to be used in symbol ‘D’ of the formula.
4.4 In determining the xed capital relating to investors, the calculation should not be done on the basis of what the investors invested, but rather on such investors’ pro rata share of the total xed capital. Furthermore, xed capital will exclude deferred tax as determined for accounting purposes.
4.5 Where nancial assistance is granted to a resident of the Republic by more than one investor as contemplated in subsection (3), the rules of section 31 will be applied to such investors, without reference to any person other than an investor having an interest in the xed capital of the resident or recipient.
5. Example
A pro table South African Company, TCS (Pty) Ltd, was capitalised in rand by its shareholders, all of them being non-residents. Only X is an investor. The company’s nancial year ends on 31 August. The RSA prime rate was 18,5% throughout the 1995/6 year of assessment. The following further information is relevant for the application of section 31:
Fixed capital
Shareholder X (2/3
Various other shareholders (1/3)
Loans
Shareholder X granted loan # 1 on 1/9/95 @ 24% p.a Shareholder X granted loan # 2 on 26/1/96 @ 18% p.a
Interest
Loan # 1: R30 000 000 at 24% for 366 days Loan # 2: R 10 000 000 at 18% for 219 days
Calculation of disallowable interest in respect of shareholder X in terms of section 31 (3)
B = R8 277 049
C = R30 000 000 for 147 days R 40 000 000 for 219 days
= D = The greater of (R10 000 000 X 3) or Rnil =
A = _8_2_7_7_0_4_9 X _(3_5_9_8_3_6_0_6__–_3_0_0_0_0_0_0_0_) 1 35 983 606
= R 1 376 365 (disallowable interest for the 1995/6 year of assessment)
R15 000 000 R10 000 000 R 5 000 000 R40 000 000 R30 000 000 R10 000 000
R 8 277 049
R7 200 000 R1 077 049
4 410 000 000 8 760 000 000
13 170 000 000 ÷ 366 R35 983 606 R30 000 000
80 SAIT CompendIum oF TAx LegISLATIon VoLume 2