Most Read Contributor in South Africa, September 2016
In terms of the 2012 Draft Taxation Laws Amendment Bill, which
was made available for comment on 13 March 2012, the long-awaited
proposed amendments to sections 8E and 8EA of the Income Tax Act
were published. Both these sections will come into operation on 1
October 2012 and will apply in respect of dividends and foreign
dividends received or accrued during years of assessment commencing
or after that date.
In terms of section 8E, any dividend or foreign dividend
received by or accrued to a person during any year of assessment,
in respect of a share which constituted a hybrid equity
instrument at any time during that year of assessment, will be
deemed in relation to the recipient thereof to be an amount of
interest accrued to the recipient. This is not an unknown
concept to South African taxpayers, as hybrid equity instruments
have been in existence for a number of years.
Section 8EA, however, is a new addition to the already
complicated South African tax legislation, and provides that any
dividend or foreign dividend received by or accrued to a person
during any year of assessment in respect of a share must be deemed
in relation to that person only to be an amount of income
received by or accrued to that person, if that share constitutes a
third-party backed share at any time during that year of
assessment. A 'third-party backed share' means any
share in respect of which an enforcement right is
exercisable or an enforcement obligation is enforceable as
a result of any amount of any specified dividend, foreign
dividend, return of capital or foreign return of capital
attributable to that share not being received by or accruing to the
person holding that share.
What is significant about the proposed amendments to both
sections 8E and 8EA, is that the definitions now refer to any
share issued by a company, as opposed to the traditional
application to preference shares. In addition, the ambit of the
application has been extended significantly, to the extent that a
number of shares which would, ordinarily, not be problematic will
become subject to these sections. Furthermore, as both sections 8E
and 8EA apply to any dividends (and foreign dividends) declared
after 1 October 2012 (as opposed to shares issued after 1 October
2011), it has the effect that every share (ordinary and preference
shares) on which dividends will be declared during years of
assessment commencing or after 1 October 2012, must be scrutinised
to determine whether such shares will be subject to the application
of sections 8E and 8EA.
To make matters worse, the drafter/s of these sections were
certainly not thinking about the concept of "simplifying
tax" when the sections were prepared. To understand how the
sections read alone requires a serious devotion of time, let alone
the interpretation of the proposed legislation. Accordingly, to
ease the pains of tax laws, we have prepared a simplified diagram
to help taxpayers to work their way through the application of
these sections. By following the two links below we provide two
diagrams, one for section 8E and another for section 8EA, which
could be followed to determine whether an existing share would fall
within any of the these provisions.
Following various discussions on the interpretation of these
sections, it has become evident that a number of share funding
structures will fall within the provisions. It is therefore
recommended that appropriate advice is sought to ensure that steps
are taken to implement the necessary amendments prior to 1 October
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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