South Africa: Binding Private And Class Rulings (Recent Developments in Corporate Taxation, May 2011)

Last Updated: 2 August 2011
Article by Daleen Malan

Deductibility of environmental expenditure in respect of assets acquired under an asset for share transaction (BPR 093)

This ruling was issued on 25 January 2011 and involved an "asset for share" transaction entered into pursuant to a black empowerment transaction, in which a holding company disposed of its entire business (including assets that need to be restored and rehabilitated by the new company) to a new company (Newco) in exchange for equity shares in Newco.

The ruling was made that, as Newco and the holding company are regarded as one and the same person in terms of section 42 of the Income Tax Act, No. 58 of 1962 (the Act), Newco will be allowed to claim a deduction under section 37B(6) of the Act (the section providing for the deduction of environmental expenditure) on the allowance assets acquired, in respect of which there was an obligation to undertake prescribed decommissioning, remediation and restoration.

Income tax implications for employees / senior executives in relation to share option / appreciation rights plans (BCR 025)

This binding class ruling was issued on 25 January 2011 and is applicable for a period of five years from 1 June 2010.

It involved a holding company which offered a long term incentive scheme and appreciation rights plan to qualifying employees and senior executives rendering services within and outside of South Africa. In terms of the incentive plans the options and rights became exercisable proportionally over a period of five years, and had to be exercised before the expiry of a ten year period in order to avoid forfeiture.

The ruling was made that non-residents are subject to income tax in South Africa in terms of the sourced based tax regime. Therefore gains made in terms of section 8A (on the exercising of rights acquired on or before 26 October 2004) or section 8C (on the vesting of an equity instrument acquired after the aforesaid date), may lead to South African tax liabilities. The gains are determined by regarding the number of days that a non-resident participant is actually present in South Africa, in proportion to the total number of days from the date that the option was granted until exercised. Only the portion so calculated to relate to the days in South Africa, will fall within the South African tax net.

Tax residents on the other hand, who are taxed on their worldwide income, may be exempt from income tax, including section 8C gains, in South Africa in terms of section 10(1)(o)(ii) of the Act, provided (and only in so far as) the services are actually rendered by them whilst outside of South Africa. The individual must be outside of South Africa for a continuous period exceeding 60 full days and 183 days in aggregate during any 12 month period commencing during any year of assessment. The computation of the 12 month period commences on the first day of any particular month and ends on the last day of the twelfth calendar month thereafter. This period does not necessarily run concurrently with a year of assessment, a financial year or even a calendar year.

Provided section 10(1)(o)(ii) applies, the gains, which are deemed to accrue evenly over the period that the services are rendered whether in or outside of South Africa, may be exempt. The exemption will be determined based on the number of days that the resident participant is outside of South Africa in proportion to the total number of days from the date that the option was granted until exercised.

It should be noted that should section 10(1)(o)(ii) apply, an employer may elect not to deduct employees' tax, but UIF and SDL will nevertheless remain payable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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