A Bsp Seminars publication · 2020. 10. 8. · Special dividend provisions ... Extracts from the Income Tax Act are taken from my private representation and adaptation of parts of

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The Taxation of Dividends

Everything you did and did not want to know about the taxation of dividends under the Income Tax Act

One of the most complex, most extensive, and most badly drafted aspects of the tax law, very probably

fully understood by no one

Volume 1

By

Costa Divaris

The Taxation of Dividends

Everything you did and did not want to know about the taxation of dividends under the Income Tax Act

By

Costa Divaris 2020 Edition Version 2

Terms and conditions

The Taxation of Dividends 2020 ed © 2020 C Divaris Bsp Seminars® Gauteng South Africa

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South African fiscal legislation


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South African fiscal legislation

Warning on the tax Acts

Every reasonable effort has been taken in this work accurately to represent the statute law in its latest form at the time of publication, with amendments being indicated by references to the relevant amending act given in small print below affected provisions. Actual application of the law requires knowledge of the detailed effective dates of such amendments; certainly, of those made seemingly close to the year of assessment or to the date of the transaction concerned

On the other hand, never consult earlier versions of South African fiscal legislation without checking forward in time to look for retroactive amendments.


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Quick contents


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Quick contents

Click on an item to go to that page

The Taxation of Dividends ................................................................................. 3 Terms and conditions ....................................................................................... 5 South African fiscal legislation ........................................................................ 7

Warning on the tax Acts ................................................................................ 7 Quick contents.................................................................................................. 9 Stylistic conventions—text ............................................................................ 13 Stylistic conventions—legislation .................................................................. 15 Contents ......................................................................................................... 17 Contents—principal sections ......................................................................... 31 Index to sections and subsections................................................................... 37 Contents—extracts from the Income Tax Act ................................................ 55 Contents—external material ........................................................................... 61 Contents—Tax Shock, Horror newsletter ...................................................... 63 Contents—case law ........................................................................................ 65

Chapter 1 .......................................................................................................... 67 Nature of dividends ........................................................................................ 67

What is a ‘dividend’? ................................................................................... 67 What is not a ‘dividend’? ............................................................................. 87 Introduction to the dividend verbs ............................................................... 97 What is a ‘company’? ................................................................................ 101 When is a company ‘resident’? .................................................................. 111 Position of offshore entities ....................................................................... 115 Definition of ‘contributed tax capital’ ....................................................... 117 Definition of ‘foreign dividend’ ................................................................ 131

Chapter 2 ........................................................................................................ 135 Taxability of dividend income ..................................................................... 135

Inclusion in gross income .......................................................................... 135 Inclusion in taxable income (CGT) ............................................................. 145 Investment vehicles: collective investment schemes ................................. 153 Investment vehicles: REITS......................................................................... 165

Chapter 3 ........................................................................................................ 175 Dividend exemptions ................................................................................... 175

Amounts not making it to taxable income ................................................. 175 The exclusions, and the annuity rider ........................................................ 179 Headquarter company dividends ............................................................... 183 Exclusion 1: from REIT or subsidiary ......................................................... 187 Exclusion 2: on restricted equity instrument.............................................. 191 Exclusion 3: derived by company by cession or trust ................................ 209 Exclusion 4: by company on borrowed shares........................................... 213 Exclusion 5: on holding and borrowing an identical share ........................ 215 Exclusion 6: by company marking to market ............................................ 219

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Exclusion 7: for services rendered ............................................................. 223 Exclusion 8: on restricted equity instruments (1st override) ....................... 227 Exclusion 9: on restricted equity instruments (2nd override) ...................... 231 Foreign dividends and HQ dividends exempted ......................................... 235 Dividends-tax-equivalence exemption ....................................................... 239 Participation and foreign-company exemptions ......................................... 243 The CFC (previously-taxed) exemption ...................................................... 251 The listed-share exemptions ...................................................................... 255 The exemptions overrides .......................................................................... 257 Other references to s 10B ........................................................................... 261

Chapter 4 ........................................................................................................ 263 Deductibility of dividend incurrals ............................................................... 263

Prohibition of deductions ........................................................................... 263 Chapter 5 ........................................................................................................ 267

Special dividend provisions ......................................................................... 267 Introduction ................................................................................................ 267 Individuals ................................................................................................. 269 Companies ................................................................................................. 281 Amalgamations .......................................................................................... 285 Capital gains tax (dividends) ..................................................................... 287 Change of residence ................................................................................... 297 Other references to ‘dividends and ‘foreign dividends’ ............................. 307

Chapter 6 ........................................................................................................ 309 Anti-avoidance provisions ............................................................................ 309

Interpretation .............................................................................................. 309 Participation exemption and trusts ............................................................. 325 Vesting equity and restricted equity instruments ....................................... 333 Hybrid equity instruments.......................................................................... 341 Third-party backed shares .......................................................................... 363 Hybrid debt instruments ............................................................................. 377 Hybrid interest ........................................................................................... 397 Pre-sale dividend-stripping ........................................................................ 413 Transfer pricing.......................................................................................... 437 General tax avoidance ................................................................................ 445 Abuse of assessed loss ............................................................................... 449 Capital gains tax: dividend-stripped loss ................................................... 463 Capital gains tax: irregular disposals ......................................................... 469 Capital gains tax: pre-sale dividend-stripping ............................................ 473

Chapter 7 ........................................................................................................ 479 International dividends ................................................................................. 479

Rebate or deduction for foreign taxes ........................................................ 479 Chapter 8 ........................................................................................................ 485

The dividends tax ......................................................................................... 485 The charging provision .............................................................................. 485 Identification of the taxpayer ..................................................................... 515 Deemed beneficial owners, deemed payment ............................................ 517 Exemptions ................................................................................................ 533 Withholding by declarer ............................................................................ 547 Withholding by regulated intermediaries and insurers .............................. 557 Payment, returns and interest ..................................................................... 565

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Refunds ...................................................................................................... 577 Rebate of foreign tax ................................................................................. 589 Definitions ................................................................................................. 591 Other references to the dividends tax ......................................................... 599 Other references to dividends in specie ..................................................... 603


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Stylistic conventions—text


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This work follows all of the conventions set out in the latest edition of the Bsp Stylebook (C Divaris, DS McAllister), a free publication.

Legislative or contractual elements that are expressly and formally defined are referred to as terms, and are embraced, when necessary, by quotation marks. Other words (single words) and expressions (a group of words) that are effectively defined or are used by me as personal terms of art are shown, when necessary, in italics, without quotation marks. Thus ‘gross income’ but hidden definition.

Otherwise, quotation marks are used purely to indicate a formal, verbatim quotation arising within the text. When a quotation appears separately from the text and indented, no quotation marks are used, while paragraph-indentations are dispensed with in the first line of the quotation and in every first line following an interruption of the quotation by indented or hanging material. Tables might not necessarily follow these rules.

Inside a quotation, quotations within the text of the quotation are embraced by single quotation marks and quotations within those quotations with double quotation marks, subject to recycling should the nesting continue. Quotations shown separately from the text of a quotation are presented without quotation marks but subject to a further indentation.

Legislative material included here is, where relevant, reproduced from my:

The Administration of Estates Act (66 of 1965) 2019 ed (January 2020).

The Diamond Export Levy (Administration) Act (14 of 2007) 2019 ed (January 2020).

The Diamond Export Levy Act (15 of 2007) 2019 ed (January 2020).

The Employment Tax Incentive Act (26 of 2013) 2019 ed version 2 (February 2020).

The Estate Duty Act (45 of 1955) 2019 ed version 2 (February 2020).

The Local Government: Municipal Property Rates Act (6 of 2004) 2019 ed (January 2020).

The Merchant Shipping (International Oil Pollution Compensation Fund) Administration Act (35 of 2013) 2019 ed (January 2020).

The Merchant Shipping (International Oil Pollution Compensation Fund) Contributions Act (36 of 2013) 2019 ed (January 2020).



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The Mineral and Petroleum Resources Royalty (Administration) Act (29 of 2008) 2019 ed (January 2020).

The Mineral and Petroleum Resources Royalty Act (28 of 2008) 2019 ed (January 2020).

The Securities Transfer Tax Act (25 of 2007) 2019 ed version 2 (February 2020).

The Securities Transfer Tax Administration Act (26 of 2007) 2019 ed (January 2020).

The Skills Development Levies Act (9 of 1999) 2019 ed (January 2020).

The South African Revenue Service Act (34 of 1997) 2019 ed (January 2020).

The Succession Acts 2019 ed (January 2020). The Tax Administration Act (28 of 2011) 2019 ed (January 2020). The Transfer Duty Act (40 of 1949) 2019 ed (January 2020). The Trust Property Control Act (57 of 1988) 2019 ed (January

2020). The Unemployment Insurance Contributions Act (4 of 2002)

2019 ed (January 2020). The Value-Added Tax Act (89 of 1991) 2019 ed version 2

(February 2020).

Extracts from the Income Tax Act are taken from my private representation and adaptation of parts of the act, based upon the consolidated version published by LexisNexis and, for contemporary or researched amendments, the relevant statutes. Each extract is followed in small print by a note indicating the amending act under which it was first enacted or last amended.

Where lists of defined terms are provided, recognition is given only to terms defined in the legislation concerned.

Stylistic conventions—legislation


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Stylistic conventions—legislation

Identifier Act, provision number (usually section, subsection; paragraph, subparagraph) Boxed heading, capitals and small capitals, title case, centred Principal subject-matter (usually section, subsection, continuation; paragraph, subparagraph, continuation. Followed by provision number in square parentheses Boxed heading, italicized, sentence case, centred Principal subject-matter of item, continuation, followed by provision number in square parentheses Boxed heading, sentence case, right-justified Principal subject-matter of sub-item, continuation Dates, periods, percentages, fractions Rendered in bold Outside parties Rendered in italics Cross-references Restated in short form within square parentheses Acts, self-references, Schedules, Parts Underlined Defined words within quotation marks Rendered in bold Defined words without quotation marks (‘as defined in’) Rendered in bold italics Quasi-defined words (‘as contemplated in’, ‘referred to’, ‘as defined in’ ‘as determined by’) Rendered in bold italics Apparent errors Either rectified within square parentheses or correction suggested within square parentheses and indicated by question mark Extracts from explanatory memoranda Rendered against shaded background Commentary, without heading, boxed, italicized Opinion on meaning or significance of or aid to interpretation of immediately preceding provision or part of a provision Commentary, headed ‘Legislative history’, boxed, italicized Details and effective date of amendment Commentary, headed ‘Past wording’, boxed, italicized Immediately preceding text of amended legislation


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Contents


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Contents


The Taxation of Dividends ................................................................................. 3 Terms and conditions ....................................................................................... 5

BSP Seminars® ............................................................................................ 6 South African fiscal legislation ........................................................................ 7

Warning on the tax Acts ................................................................................ 7 Quick contents.................................................................................................. 9 Stylistic conventions—text ............................................................................ 13 Stylistic conventions—legislation .................................................................. 15 Contents ......................................................................................................... 17 Contents—principal sections ......................................................................... 31 Index to sections and subsections................................................................... 37 Contents—extracts from the Income Tax Act ................................................ 55 Contents—external material ........................................................................... 61 Contents—Tax Shock, Horror newsletter ...................................................... 63 Contents—case law ........................................................................................ 65

Chapter 1 .......................................................................................................... 67 Nature of dividends ........................................................................................ 67

What is a ‘dividend’? ................................................................................... 67 1.1 As commonly understood .................................................................... 67 1.2 ‘Treaty’ dividends ............................................................................... 67 1.3 Dividends under the Income Tax Act .................................................. 68 1.4 Definition of ‘dividend’: introduction ................................................. 68 1.5 Further reading: development of the definition ................................... 69 1.6 Definition of ‘foreign dividend’: introduction ..................................... 78 1.7 What is and what is not a ‘dividend’ ................................................... 79

Primary statement of what is a ‘dividend’ .............................................. 79 Exclusion the first: transfer-pricing, deemed dividends .......................... 79 Exclusions the second to the fourth: miscellaneous ................................ 80

1.8 Essence of a ‘dividend’ ....................................................................... 81 Principal party—a company.................................................................... 81 The company must have shares .............................................................. 81 Ownership by secondary party ................................................................ 82 Amount passes to secondary party .......................................................... 84

1.9 Difference between dividends and foreign dividends.......................... 85 What is not a ‘dividend’? ............................................................................. 87

1.10 Four exclusions from the definition................................................... 87 1.11 The transfer-pricing, deemed-dividend exclusion (1)........................ 88

The boondoggle that is transfer-pricing .................................................. 88 The transfer-pricing deemed dividend–s 31(3) ....................................... 88 It is not a ‘dividend’ but it is a dividend, got it? ..................................... 89 What is actually excluded ....................................................................... 91

Contents


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1.12 The other three exclusions: introduction ........................................... 93 1.13 The return-of-contributed-capital exclusion (2) ................................ 93 1.14 The issue-of-capitalization-shares exclusion (3) ............................... 93 1.15 The listed-buybacks (4) ..................................................................... 95

Introduction to the dividend verbs ............................................................... 97 1.16 Definition of a ‘dividend’: ‘distribute’, ‘buy’ .................................... 97

Primary patrimonial transaction: distribution .......................................... 97 Secondary patrimonial transaction: purchase and sale ............................ 98 Tertiary patrimonial transaction: transfer-pricing ................................... 98

1.17 Definition of a ‘dividend’: ‘transfer’, ‘apply’ .................................... 98 ‘Transfer’ ................................................................................................ 99 ‘Application’ ........................................................................................... 99 An unimportant mystery ......................................................................... 99 Explanation of the definition? ............................................................... 100

What is a ‘company’? ................................................................................ 101 1.18 What is a ‘company’? ...................................................................... 101

The indubitable companies ................................................................... 102 Incorporated and unincorporated bodies of persons .............................. 103

1.19 Further reading: what is a ‘company’? ............................................ 104 When is a company ‘resident’? .................................................................. 111

1.20 When is a company ‘resident’?........................................................ 111 Exclusion of treaty persons ................................................................... 113

Position of offshore entities ....................................................................... 115 1.21 Position of offshore entities ............................................................. 115

Definition of ‘contributed tax capital’ ....................................................... 117 1.22 The squeezed-balloon principle of legal drafting ............................ 117 1.23 ‘Contributed tax capital’: can you possibly be serious? .................. 119

Classes of shares ................................................................................... 119 Foreign companies and foreign dividends............................................. 120 Domestic companies ............................................................................. 121

1. Old capital: capitalized profits (balance remaining) ....................... 122 2. New capital (add) ............................................................................ 122 3. Conversion consideration (add) ...................................................... 122 4. Conversion historically determined amount (add) .......................... 123 Next comes the reduction ................................................................... 123 5. New transfers for benefit of person holding shares (deduct) .......... 124 Subject to a cap ................................................................................... 124 The official view ................................................................................. 125

Foreign company a resident on or after 1 January 2011 ....................... 125 1.24 ‘Group company avoidance—s 8G ................................................. 127

Definition of ‘foreign dividend’ ................................................................. 131 1.25 Dividends v foreign dividends ......................................................... 131 1.26 What is and what is not a foreign dividend ..................................... 131

What is known and what is to be discovered ........................................ 132 1.27 The dividend verbs: definition of a ‘foreign dividend’ .................... 132

An important difference from a ‘dividend’ ........................................... 133 Chapter 2 ........................................................................................................ 135

Taxability of dividend income ..................................................................... 135 Inclusion in gross income .......................................................................... 135

2.1 Difference between income tax and the capital gains tax .................. 135

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2.2 Getting to ‘gross income’ .................................................................. 136 2.3 So what, really, is ‘gross income’? .................................................... 138

The para (n) inclusions in ‘gross income’ ............................................. 139 What all the inclusions aim at and achieve ........................................... 139

2.4 Dividends: a significant inclusion ..................................................... 139 If not exempt, subject to income tax ..................................................... 140 Which ‘dividends’? ............................................................................... 140 Consequences of inclusion in gross income (1) .................................... 140 Consequences of inclusion in gross income (2) .................................... 141

2.5 More on para (k) of the definition of ‘gross income’ ........................ 141 Residents ............................................................................................... 142 Nonresidents ......................................................................................... 142 Source of dividends and foreign dividends ........................................... 143

2.6 The dividend verbs: definition of a ‘gross income’ ........................... 143 Inclusion in taxable income (CGT) ............................................................. 145

2.7 Dividends and the CGT ...................................................................... 145 2.8 Capitalization shares.......................................................................... 145 2.9 Share buybacks: unlisted company.................................................... 148 2.10 Share buybacks: listed company ..................................................... 148 2.11 Nonresidents .................................................................................... 149 2.12 Foreign dividends ............................................................................ 150

Investment vehicles: collective investment schemes ................................. 153 2.13 Collective investment schemes pass-through rule—s 25BA ........... 153

Heads-up ............................................................................................... 153 How collective investment schemes are constituted ............................. 153 CIS in property qualifying as a listed REIT ............................................. 155 Identifying the taxpayer—s 25BA(1).................................................... 156 The portfolio derives amounts .............................................................. 157 The holders are taxed ............................................................................ 157 The portfolio is taxed ............................................................................ 157 Deeming dividends to be ‘income’ ....................................................... 158 Taxation of the holders and of the portfolio .......................................... 159 Amounts of a capital nature .................................................................. 159

2.14 Portfolio of a hedge fund CIS—s 25BA(2) ...................................... 159 2.15 Exemption of previously taxed amounts—s 10(1)(iB) .................... 160 2.16 Offshore portfolios .......................................................................... 161

Investment vehicles: REITS......................................................................... 165 2.17 How REITs are taxed ........................................................................ 165 2.18 What is a REIT? ................................................................................ 165

CIS in property qualifying as a listed REIT ............................................. 166 Heads-up ............................................................................................... 166

2.19 REITs make dividends and foreign dividends................................... 166 2.20 Interest from a REIT—S 25BB(6)(a), (6)(b) ..................................... 166 2.21 Deduction for REIT—S 25BB(2) ...................................................... 168 2.22 Position of shareholders .................................................................. 169

Dividends included in gross income ..................................................... 169 Dividends from a REIT or its subsidiary ................................................ 169 Taxable dividends ................................................................................. 171 Exempt dividends.................................................................................. 173

2.23 Crushing complexity ....................................................................... 173

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2.24 Further reading: income from a REIT ............................................... 173 Chapter 3 ........................................................................................................ 175

Dividend exemptions.................................................................................... 175 Amounts not making it to taxable income ................................................. 175

3.1 Exempt dividends .............................................................................. 175 It’s the exclusions, stupid ...................................................................... 175 The exemption, simpliciter .................................................................... 175

3.2 Exempt dividends: the exemption proper—s 10(1)(k)(i) ................... 176 Out of para (a) ‘computational’ taxable income.................................... 176 Out, also, of para (b) ‘inclusional’ taxable income ............................... 177 The upshot ............................................................................................. 177

3.3 Other references to the s 10(1)(k) dividend exemption ..................... 177 The exclusions, and the annuity rider ........................................................ 179

3.4 The nine exclusions from the exemption ........................................... 179 3.5 The annuity rider—s 10(2)(b) ............................................................ 179 3.6 Further reading: annuity from exempt interest or dividends.............. 181

Headquarter company dividends ................................................................ 183 3.7 From a headquarter company: irrelevant—s 10B(1)(k)(i) ................. 183 3.8 The dividend verbs: exclusion of headquarter companies ................. 183 3.9 Headquarter companies ..................................................................... 184 3.10 Headquarter company dividends not ‘taxable income’ ................... 185

Exclusion 1: from REIT or subsidiary ......................................................... 187 3.11 From a REIT or its subsidiary—s 10(1)(k)(i)(aa) ............................. 187 3.12 The dividend verbs: exclusion of REITs ........................................... 188 3.13 Taxable dividends ............................................................................ 189 3.14 Exempt dividends ............................................................................ 189

Exclusion 2: on restricted equity instrument .............................................. 191 3.15 From restricted equity instrument—s 10(1)(k)(i)(dd) ...................... 191

Restricted equity instrument ................................................................. 193 Other definitions relevant to the s 10(1)(k)(i)(dd) exclusion ................ 194

3.16 The dividend verbs: exclusion of S 8C instruments ......................... 199 3.17 Taxable dividends ............................................................................ 199 3.18 Exempt dividends ............................................................................ 199 3.19 Taxable dividends (more) ................................................................ 200 3.20 Subject to two overrides .................................................................. 204 3.21 Such dividends, when taxable, are liable to PAYE ........................... 204

Exclusion 3: derived by company by cession or trust ................................ 209 3.22 By company by cession or trust—s 10(1)(k)(i)(ee) ......................... 209 3.23 The dividend verbs: exclusion if derived by cession, trust .............. 210 3.24 Taxable dividends ............................................................................ 211 3.25 Exempt dividends ............................................................................ 211 3.26 Discretionary distributions by trusts ................................................ 211

Exclusion 4: by company on borrowed shares ........................................... 213 3.27 By company on borrowed shares—s 10(1)(k)(i)(ff)......................... 213 3.28 The dividend verbs: exclusion if on borrowed shares ..................... 213 3.29 Taxable dividends ............................................................................ 214

Exclusion 5: on holding and borrowing an identical share ........................ 215 3.30 On holding & borrowing identical share—s 10(1)(k)(i)(gg) ........... 215 3.31 The dividend verbs: holding, borrowing an identical share ............. 217

Exclusion 6: by company marking to market ............................................ 219

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3.32 By company marking to market—s 10(1)(k)(i)(hh) ........................ 219 3.33 The dividend verbs: by company marking to market ...................... 222

Exclusion 7: for services rendered ............................................................. 223 3.34 Derived for services rendered—s 10(1)(k)(i)(ii) .............................. 223 3.35 The dividend verbs: derived for services rendered .......................... 224 3.36 Taxable dividends............................................................................ 224 3.37 Exempt dividends ............................................................................ 225 3.38 Subject to an override ...................................................................... 225 3.39 Such dividends, when taxable, are liable to PAYE ........................... 225

Exclusion 8: on restricted equity instruments (1st override) ...................... 227 3.40 On restricted e/instruments (1st override)— s 10(1)(k)(i)(jj) ........... 227 3.41 The dividend verbs: restricted e/instruments (1st override) ............. 228 3.42 Overrides s 10(1)(k)(i)(dd) and (ii) .................................................. 228 3.43 Such dividends are liable to PAYE ................................................... 228

Exclusion 9: on restricted equity instruments (2nd override) ...................... 231 3.44 On restricted e/instruments (2nd override)—s 10(1)(k)(i)(jj) ........... 231 3.45 The dividend verbs: r/e/instruments (2nd override) .......................... 232 3.46 Overrides s 10(1)(k)(i)(dd) and (ii) .................................................. 232

Can’t see the difference between s 10(1)(k)(i)(jj) and (kk)? ................. 232 3.47 Such dividends are liable to PAYE ................................................... 233

Foreign dividends and HQ dividends exempted ......................................... 235 3.48 A ‘foreign dividend’ is not always what you think—s 10B ............ 235 3.49 The dividend verbs: dividends from HQ companies ........................ 236 3.50 A second set of exemptions—s 10B(2) ........................................... 237

Dividends-tax-equivalence exemption ....................................................... 239 3.51 Fall-back exemption—dividends-tax-equivalence—s 10B(3) ........ 239 3.52 Overrides on the s 10B(3) exemption .............................................. 241 3.53 The dividend verbs: s 10B(3) dividends-tax exemption .................. 241

Participation and foreign-company exemptions ........................................ 243 3.54 Participation & foreign-co exemptions—s 10B(2)(a), (b) ............... 243

The dividend verbs: participation & foreign-company dividends ......... 243 Shoddy drafting, as usual ...................................................................... 243 Section 10B(2)(a), (b) to be read with the s 10B(4) clog ...................... 243

3.55 Participation exemption—s 10B(2)(a) ............................................ 245 The dividend verbs: participation exemption ........................................ 245 1st proviso: foreign dividends from a foreign company only ................ 246 The dividend verbs: foreign dividends from foreign company ............. 246 2nd proviso: foreign dividends & dividends from HQ company............. 246 Drafting error ........................................................................................ 246 The participation exemption in a trust environment ............................. 246

3.56 Country-to-country exemption—s 10B(2)(b) .................................. 246 The dividend verbs: country-to-country exemption .............................. 247 1st proviso: foreign dividends from a foreign company only ................ 247 The dividend verbs: foreign dividends from foreign company ............. 248

3.57 Exclusions from these exemptions—s 10B(4) ................................ 248 Deductible but not taxable—s 10B(4)(a) .............................................. 248 Foreign CIS—s 10B(4)(b) ...................................................................... 249

3.58 Overrides on the s 10B(2)(a), (b) exemptions ................................. 249 3.59 The dividend-verbs: s 10B(2)(a) and (b) exemptions ...................... 249

The CFC (previously-taxed) exemption ...................................................... 251

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3.60 The CFC (previously-taxed) exemption—s 10B(2)(c)...................... 251 3.61 Beneficiary ...................................................................................... 252 3.62 Foreign dividends ............................................................................ 252 3.63 Basis of exemption .......................................................................... 252 3.64 Overrides on the s 10B(2)(c) exemption ......................................... 252 3.65 The dividend-verbs: s 10B(2)(c) exemption .................................... 252

The listed-share exemptions ...................................................................... 255 3.66 The listed-share exemptions— s 10B(2)(d), (e) .............................. 255 3.67 Listed shares .................................................................................... 255 3.68 Overrides on the s 10B(2)(d), (e) exemptions ................................. 256 3.69 The dividend-verbs: s 10B(2)(d) and (e) exemptions ...................... 256

The exemptions overrides .......................................................................... 257 3.70 The exemptions-overrides—s 10B(5), (6) ....................................... 257 3.71 Annuity or foreign-dividend override—s 10B(5) ............................ 257 3.72 Service-related foreign dividends override—s 10B(6) .................... 258

Employment and the holding of an office—s 10(6)(a) ......................... 258 Share-incentive scheme shares—s 10(6)(b) .......................................... 259

3.73 The dividend-verbs: s 10B(5) and (6) overrides .............................. 260 Other references to s 10B ........................................................................... 261

3.74 Other references to s 10B ................................................................ 261 Chapter 4 ........................................................................................................ 263

Deductibility of dividend incurrals ............................................................... 263 Prohibition of deductions ........................................................................... 263

4.1 The systemic problem ........................................................................ 263 4.2 Why dividends distributed are not deductible ................................... 263 4.3 The general deduction formula (a little extended) ............................. 264 4.4 Prohibition of deductions from foreign-dividend income ................. 265

Chapter 5 ........................................................................................................ 267 Special dividend provisions ......................................................................... 267

Introduction ................................................................................................ 267 5.1 Introduction: dividends v foreign dividends ...................................... 267

Individuals ................................................................................................. 269 5.2 Individuals deriving dividends .......................................................... 269

Residents v nonresidents ....................................................................... 269 Dividends are generally exempt ............................................................ 270 Foreign dividends are generally taxable ................................................ 270 Complicating factors ............................................................................. 270

5.3 Section 8C dividends ......................................................................... 270 Taxing a s 8C gain, allowing a loss ....................................................... 270 Excluded from gross income from ordinary remuneration ................... 271 But s 8C(1) does not always apply—s 8C(1A) ..................................... 272

Return of capital ................................................................................. 273 Dividends ............................................................................................ 273 Double-counting ................................................................................. 274

The dividend exemptions and s 8C ....................................................... 274 Other references to s 8C ........................................................................ 276

5.4 Dividends for services rendered ........................................................ 277 5.5 Individuals deriving foreign dividends .............................................. 277

Override on s 10B(2) and s 10B(3) exemptions—I............................... 278 Override on s 10B(2) and s 10B(3) exemptions—II ............................. 278

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Companies ................................................................................................. 281 5.6 Companies deriving dividends .......................................................... 281

Residents v nonresidents ....................................................................... 281 Dividends are generally exempt ............................................................ 282 Foreign dividends are generally taxable ............................................... 282 Complicating factors ............................................................................. 282

5.7 Companies deriving foreign dividends .............................................. 283 Override on s 10B(2) and s 10B(3) exemptions—I .............................. 283 Override on s 10B(2) and s 10B(3) exemptions—II ............................. 283

Amalgamations .......................................................................................... 285 5.8 Amalgamations make transfers & applications—s 44(6)(e) .............. 285

Capital gains tax (dividends) ..................................................................... 287 5.9 Exclusion from proceeds—8th Sch para 35(3)(a) .............................. 287 5.10 Other references to dividends and foreign dividends ...................... 287 5.11 The dividend-verbs—Eighth Schedule ............................................ 287 5.12 ‘Date of distribution’—8th Sch para 74 ........................................... 287 5.13 Distributions in kind—8th Sch para 75(1)........................................ 288

Assets .................................................................................................... 290 Share ..................................................................................................... 290 Market value ......................................................................................... 291

5.14 Returns of capital–8th Sch para 76 ................................................... 291 5.15 Reduction of base cost—8th Sch para 76B ...................................... 293 5.16 In liquidation or deregistration—8th Sch para 77 ............................ 295

Change of residence ................................................................................... 297 5.17 Company ceasing to be resident ...................................................... 297

How residence changes ......................................................................... 297 Residence in the exit year ..................................................................... 297 Two ‘years of assessment’ in the year of exit ....................................... 298 Reporting requirements in the year of exit ............................................ 299 The exit tax ........................................................................................... 299 The deemed dividend—s 9H(3)(c)(iii) .................................................. 299 Imposition of the dividends tax—s 64EA ............................................. 300 Clawback of participation exemption—s 9H(3)(f) ............................... 300 Clawback of disregarded capital gain—8th Sch para 64B(1) ................ 301

5.18 Further reading: company ceasing to be resident ............................ 302 Other references to ‘dividends and ‘foreign dividends’ ............................. 307

5.19 Other references to ‘dividends and ‘foreign dividends’ .................. 307 5.20 In the Sixth Schedule ....................................................................... 308

Chapter 6 ........................................................................................................ 309 Anti-avoidance provisions ........................................................................... 309

Interpretation ............................................................................................. 309 6.1 The golden rule .................................................................................. 309 6.2 The Endumeni Municipality case ...................................................... 309

Comment ............................................................................................... 311 Comment ............................................................................................... 313 Comment ............................................................................................... 314

In between ‘the intention of the legislature’ and ‘studied literalism’ . 314 6.3 Daniels v Scribante and Another ....................................................... 314 6.4 Glen Anil Development Corporation Ltd .......................................... 315

Hleka v Johannesburg City Council ...................................................... 316

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Olley v Maasdorp .................................................................................. 316 6.5 Anti-avoidance provisions do not necessarily self-identify ............... 317

Ovenstone v CIR .................................................................................... 317 CSARS v Airworld .................................................................................. 320

6.6 A common thread .............................................................................. 323 Participation exemption and trusts ............................................................. 325

6.7 Resident-to-nonresident diversion—s 7(8) ....................................... 325 Inclusion in income—s 7(8)(a) ............................................................. 325 Acts of liberality.................................................................................... 325 Exclusions ............................................................................................. 325 How s 7(8)(a) works ............................................................................. 326 The CFC participation exemption—s 10B(2)(a) .................................... 326 Withholding the CFC participation exemption—s 7(8)(aA) .................. 327

6.8 Trust capital distributions: income tax—s 25B(2A) .......................... 328 Capital of a nonresident trust ................................................................ 329 Withholding the CFC participation exemption ....................................... 330

Vesting equity and restricted equity instruments ....................................... 333 6.9 Vesting and restricted equity instruments—s 8C .............................. 333

Incentive scheme v management buyout............................................... 335 Section 8C overrides ss 9C and 23(m) .................................................. 335 Section 8C and the s 10(1)(k)(i)(dd) exclusion ..................................... 335 Unhindered evasion ............................................................................... 336 Exclusions—s 8C(1)(b) ......................................................................... 337

6.10 The definitional burden ................................................................... 337 Equity instruments ................................................................................ 337 Restricted equity instrument ................................................................. 338

Hybrid equity instruments.......................................................................... 341 6.11 Tainted financial products: introduction .......................................... 341 6.12 Hybrid equity instruments—s 8E .................................................... 341

Overriding the exemptions .................................................................... 346 Effect on residents and nonresidents ..................................................... 347 Purpose of s 8E(2) ................................................................................. 347

6.13 Exclusion of qualifying old hybrid equity instruments .................... 348 6.14 The definitional burden ................................................................... 348

Date of issue .......................................................................................... 349 Equity instrument .................................................................................. 350 Financial instrument .............................................................................. 350 Hybrid equity instrument ...................................................................... 350

1. Tainted redeemable shares (para (a) of the definition) ................... 352 2. Tainted equity shares (para (b)) ...................................................... 353 3. Tainted preference shares (para (c)) ............................................... 355 4. Tainted equity instruments (para (d)) ............................................. 355 5. Deeply tainted equity instruments (para (e)) ................................... 356

Preference share .................................................................................... 356 Qualifying purpose ................................................................................ 357

1. To fund the acquisition of equity shares in an operating company (para (a)) ............................................................................................. 359 2. To fund qualifying borrowings, acquisitions or redemptions, an holding costs (para (b)) ....................................................................... 360 3. To fund a qualifying acquisition or redemption of a preference share

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(para (c)) ............................................................................................. 360 4. To fund dividends or foreign dividends on such a preference share (para (d)) ............................................................................................. 361

6.15 Other references .............................................................................. 361 Third-party backed shares .......................................................................... 363

6.16 Third-party backed shares—ss 8EA ................................................ 363 Effect on residents and nonresidents ..................................................... 366 Purpose of s 8EA(2) .............................................................................. 366

6.17 Exclusion of qualifying old third-party backed shares .................... 366 6.18 Determination disregardings ........................................................... 367 6.19 The definitional burden ................................................................... 369

Enforcement right ................................................................................. 369 Equity instrument .................................................................................. 370 Operating company ............................................................................... 370 Preference share .................................................................................... 371 Qualifying purpose................................................................................ 371 Third-party backed share ...................................................................... 373

6.20 Other references .............................................................................. 375 Hybrid debt instruments ............................................................................ 377

6.21 Interest on hybrid debt instruments—s 8F ...................................... 377 For borrower (incurring company)........................................................ 382 For lender (person owed amount) ......................................................... 382

6.22 When s 8F(2) does not apply—s 8F(3) ........................................... 382 Small business corporations: excluded—s 8F(3)(a) .............................. 383 Loans by banks, controlling companies: excluded—s 8F(3)(b) ............ 384 Short-term and long-term insurers: excluded—s 8F(3)(c) .................... 384 Linked units held by privileged parties: excluded—s 8F(3)(d) ............ 384 Third-party backed instruments: excluded—s 8F(3)(e) ........................ 385 Hybrid debt instruments: excluded—s 8F(3)(f) .................................... 385

6.23 The definitional burden ................................................................... 386 Enforcement right ................................................................................. 386 Hybrid debt instrument ......................................................................... 386

1. Convertible or exchangeable instrument (para (a)) ........................ 387 2. Obligation to pay dependent upon solvency (para (b) .................... 388 3. Connected person debt on the never-never (para (c) ...................... 388

Instrument ............................................................................................. 389 Interest .................................................................................................. 390 Issue ...................................................................................................... 391 Redeem ................................................................................................. 392 Third-party backed instrument .............................................................. 392

6.24 Other references .............................................................................. 393 6.25 Further reading: how tax laws are ‘crafted’—s 8F .......................... 393

Hybrid interest ........................................................................................... 397 6.26 Hybrid interest—ss 8FA .................................................................. 397

For borrower (incurring company)........................................................ 400 For lender (person owed amount) ......................................................... 400

6.27 When s 8FA(2) does not apply ........................................................ 401 Small business corporations: excluded—s 8FA(3)(a) ........................... 402 Loans by banks, controlling companies: excluded—s 8FA(3)(b) ......... 402 Short-term and long-term insurers: excluded—s 8FA(3)(c) ................. 403

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Linked units held by privileged parties: excluded—s 8FA(3)(d) .......... 403 Third-party backed instruments: excluded—s 8FA(3)(e) ..................... 403

6.28 The definitional burden ................................................................... 404 Hybrid interest....................................................................................... 404 Instrument ............................................................................................. 405 Interest................................................................................................... 406 Issue ...................................................................................................... 407

6.29 Other references............................................................................... 408 Pre-sale dividend-stripping ........................................................................ 413

6.30 Why bother about pre-sale dividend-stripping? ............................... 413 6.31 Pre-sale dividend-stripping—s 22B(2), (4) ..................................... 413

The real trigger: shares sold must be trading stock? ............................. 426 Then there’s the other qualification stuff .............................................. 427 Apportionment called for ...................................................................... 427 And now for the consequences.............................................................. 427 Subject, wait for it, to a proviso ............................................................ 428

6.32 Disposal after restructuring transaction—s 22B(3) ......................... 429 6.33 The definitional burden ................................................................... 430

Deferral transaction ............................................................................... 430 Exempt dividend ................................................................................... 431 Extraordinary dividend.......................................................................... 431

Non-preference shares ........................................................................ 432 Preference shares ................................................................................ 433 The proviso ......................................................................................... 433

Preference share .................................................................................... 433 Qualifying interest ................................................................................. 434

The holding is judged in the context of ‘connectedness’ .................... 435 Unlisted companies ............................................................................. 435 Listed companies ................................................................................ 435

6.34 Other references............................................................................... 436 Transfer pricing.......................................................................................... 437

6.35 International transfer pricing—s 31 ................................................. 437 You can try this at home ....................................................................... 439 The thin-capitalization scam ................................................................. 439 Transfer-pricing triggers—s 31(2) ........................................................ 440

Getting past s 31(2)(a) ........................................................................ 440 Getting past s 31(2)(b)(i) .................................................................... 443 Getting past s 31(2)(b)(ii) ................................................................... 443

General tax avoidance ................................................................................ 445 6.36 General tax avoidance—s 80A ff ..................................................... 445

Definition of a ‘tax benefit’ ................................................................... 446 Abuse of assessed loss ............................................................................... 449

6.37 Abuse of assessed loss—s 103(2) .................................................... 449 6.38 The rebuttable presumption (reverse onus)—s 103(4) .................... 452 6.39 Impermissible cessions—s 103(5) ................................................... 453 6.40 Other references............................................................................... 454 6.41 Further reading: ‘direct’ v ‘indirect’ ................................................ 454 6.42 Further reading: cession of income-streams .................................... 457

Capital gains tax: dividend-stripped loss ................................................... 463 6.43 Exempt dividends and the CGT—8th Sch para 19 ............................ 463

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6.44 Dividend-stripped disposal of shares—8th Sch para 19(1) .............. 464 Paragraph 43A takes precedence—8th Sch para 19(1) .......................... 465 Trigger is disposal of shares—8th Sch para 19(1) ................................. 465 Generating exempt dividends—8th Sch para 19(1)(a) ........................... 465 Or extraordinary exempt dividends—8th Sch para 19(1)(b) .................. 466

When para 19(1)(b) does not apply .................................................... 467 That eighteen-month period—8th Sch para 19(1)(a) ............................. 467

Capital gains tax: irregular disposals ......................................................... 469 6.45 Irregular disposals—8th Sch para 38(1) ........................................... 469

When para 38(1) does not apply ........................................................... 470 Capital gains tax: pre-sale dividend-stripping ........................................... 473

6.46 Why bother about pre-sale dividend-stripping? .............................. 473 6.47 Pre-sale dividend-stripping—8th Sch para 43A ............................... 473

Chapter 7 ........................................................................................................ 479 International dividends ................................................................................. 479

Rebate or deduction for foreign taxes ........................................................ 479 7.1 Foreign taxes on foreign dividends—s 6quat(1) ............................... 479 7.2 Optional deduction—s 6quat(1C)(a) ................................................. 481 7.3 Prescription override—s 6quat(5) ..................................................... 482

Chapter 8 ........................................................................................................ 485 The dividends tax ......................................................................................... 485

The charging provision .............................................................................. 485 8.1 Statutory torture ................................................................................. 485 8.2 Further reading: how the dividends tax was misbegotten.................. 485 8.3 Introduction to s 64D ‘dividends’ ...................................................... 486

Dividends in kind and dividends in…cash? .......................................... 487 The dividend-verb—s 64D.................................................................... 487 Just how many ‘dividends’ are there? ................................................... 489 Identifying ‘in cash’, identifying ‘in kind’ ............................................ 490 Is it simply a matter of ‘in cash’ or ‘in kind’? ....................................... 492 What the dividends tax targets—in cash and in kind ............................ 493

8.4 Levy of the dividends tax—s 64E(1) ................................................. 493 Oil and gas companies (Tenth Schedule) .............................................. 494 Headquarter companies ......................................................................... 494 The amount of a dividend ..................................................................... 494 Paid ....................................................................................................... 495 What is a ‘company’? ........................................................................... 495

8.5 Deemed date of payment—s 64E(2) ................................................. 495 The dividend-verbs—the dividends tax ................................................ 496 Cash dividends ...................................................................................... 496 Dividends in kind .................................................................................. 498

8.6 Valuing a dividend in kind—s 64E(3) ............................................... 498 8.7 Debts as dividends—s 64E(4) ........................................................... 501 8.8 Currency conversion—s 64E(5) ........................................................ 505 8.9 Deemed payment by withholder—s 64E(6) ...................................... 506 8.10 Further reading: aspects of the dividends tax .................................. 507

Identification of the taxpayer ..................................................................... 515 8.11 The other piece of a broken charging provision—s 64EA .............. 515

Who is the taxpayer? ............................................................................. 515 Deemed beneficial owners, deemed payment ............................................ 517

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8.12 An unpromising concept: ‘beneficial owner’ .................................. 517 8.13 Deemed beneficial owners—s 64EB(1) .......................................... 517 8.14 Deemed payment of dividend—s 64EB(2) ...................................... 521 8.15 Deemed beneficial owner—s 64EB(3) ............................................ 522

Resale agreement .................................................................................. 524 8.16 The dividend-verbs: ‘declared’—s 64EB ........................................ 524 8.17 How are trusts affected? .................................................................. 524

Type of trust concerned ......................................................................... 525 Role of s 25B(1) and para 80 ................................................................ 526 When the trust is invalid ....................................................................... 526 Role of payment .................................................................................... 526

8.18 Further reading: trusts and the dividends tax ................................... 528 Exemptions ................................................................................................ 533

8.19 Three types of exemption ................................................................ 533 8.20 Exemptions for cash dividends—s 64F(1)....................................... 533

Immediately intelligible exemptions ..................................................... 534 Beneficial owner of dividend is resident company ............................. 534 Beneficial owner is the SA government .............................................. 535 Beneficial owner receives dividend as ‘income’ ................................ 535 Beneficial owner receives dividend subject to the STC ....................... 535

Exemptions that are obvious despite cross-referencing ........................ 536 Beneficial owner is an approved PBO.................................................. 536 Beneficial owner is a small business funding entity ........................... 536 Beneficial owner is natural person paid dividends on a tax-free investment ........................................................................................... 536

Exemptions requiring a little effort ....................................................... 537 Beneficial owner is a nonresident paid a targeted foreign dividend ... 537 Beneficial owner is shareholder in a registered micro business.......... 537

Exemptions that are a bloody cheek ...................................................... 537 Beneficial owner is a s 37A trust ........................................................ 537 Beneficial owner is a s 10(1)(cA) institution or body ......................... 538 Beneficial owner is a s 10(1)(d)(i) or (ii) fund.................................... 538 Beneficial owner is a s 10(1)(t) person ............................................... 538 Beneficial owner is a s 10(1)(d)(iii) fidelity or indemnity fund .......... 538

Obsolete exemption—s 64F(2) ............................................................. 539 8.21 Exemption for dividends in kind—s 64FA(1) ................................. 539

Declaration by payee—s 64FA(1)(a) .................................................... 540 Beneficial owner is a group company—s 64FA(1)(b) .......................... 541 Dividend is extraction of residence—s 64FA(1)(c) .............................. 541 Dividend is swap by share block company—s 64FA(1)(d) .................. 542

8.22 Another piece of the charging provision—s 64FA(2) ..................... 542 8.23 Shelf-life of declaration and undertaking—s 64FA(3) .................... 544 8.24 The dividend-verbs: s 64FA dividends in kind ................................ 544

Withholding by declarer ............................................................................ 547 8.25 The withholding imperative—s 64G(1) ........................................... 547

Who must withhold ............................................................................... 547 The source of the withholding ............................................................... 548 ‘To the extent that’ ................................................................................ 548 The calculation of the withholding ........................................................ 549 The two ‘subject-to’ cross-references ................................................... 549

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8.26 The dividend-verbs: s 64G(1) cash dividends ................................. 549 8.27 The inevitable exclusions—s 64G(2) .............................................. 550

Exclusion by declaration—s 64G(2)(a) ................................................ 550 Exclusion by destination—s 64G(2)(b), (c) .......................................... 551

8.28 Reduced—rate withholding—s 64G(3) ........................................... 552 8.29 Shelf-life of declaration and undertaking—s 64G(4) ...................... 554 8.30 The dividend-verbs: s 64G(2) and (3) cash dividends ..................... 555

Withholding by regulated intermediaries and insurers .............................. 557 8.31 And then there are intermediaries .................................................... 557 8.32 The withholding imperative—s 64H(1) .......................................... 557 8.33 The inevitable exclusions—s 64H(2) .............................................. 557

Exclusion by declaration—s 64H(2)(a) ................................................ 558 Exclusion by destination—s 64H(2)(b), (c) .......................................... 559

8.34 Reduced-rate withholding—s 64H(3) ............................................. 560 8.35 Shelf-life of declaration and undertaking—s 64H(4) ...................... 561 8.36 Not to forget long-term insurers—s64I ........................................... 562

Payment, returns and interest ..................................................................... 565 8.37 An unsatisfactory payment regime? ................................................ 565 8.38 When the beneficial owner must pay—s 64K(1)(a) ........................ 565 8.39 When the company must pay—s 64K(1)(b) .................................... 565 8.40 When the withholder must pay—s 64K(1)(c) ................................. 566

Set-off by withholder ............................................................................ 567 Meaning of ‘month’ .............................................................................. 567 Payment to SARS ................................................................................... 568

8.41 Further reading: withholding and payment issues ........................... 568 8.42 Dividends tax returns—s 64K(1A) .................................................. 571 8.43 Submission of reduced-rate declarations—s 64K(4) ....................... 573

Prescribed.............................................................................................. 573 Declarations required ............................................................................ 574

8.44 Interest—s 64K(6) ........................................................................... 575 Refunds ...................................................................................................... 577

8.45 Tailored to the needs of a bust government ..................................... 577 8.46 Refund of tax—s 64L(1) ................................................................. 577 8.47 Rebate—s 64L(1A) ......................................................................... 579 8.48 Refund by company—s 64L(2) ....................................................... 581 8.49 Recovery from Commissioner—s 64L(3) ....................................... 583 8.50 Statute of limitations—s 64L(4) ...................................................... 583

This style of drafting is actually taught, in looney bins ........................ 584 8.51 Refunds on dividends in kind—s 64LA .......................................... 585 8.52 Refunds by intermediaries—s 64M ................................................. 587

Rebate of foreign tax ................................................................................. 589 8.53 Foreign dividends from foreign companies—s 64N........................ 589

Definitions ................................................................................................. 591 8.54 Definitions—some strange, most inconvenient ............................... 591

Beneficial owner ................................................................................... 593 Too many ‘dividends’ ........................................................................... 594 Too much confusion ............................................................................. 594 Definitional crisis .................................................................................. 595 Which foreign dividends are targeted? ................................................. 596 Effective date ........................................................................................ 596

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Regulated intermediary ......................................................................... 596 Other references to the dividends tax ......................................................... 599

8.55 The dividends tax in the rest of the act ............................................ 599 International shipping exemption—s 12Q(3) ........................................ 599 Interest from REIT or controlled co as dividend—s 25BB(6)(c) ............ 599 Oil and gas companies exemption—s 26B(2) ....................................... 600 Unbundling transaction exemption—s 46(5) ........................................ 601

Other references to dividends in specie ..................................................... 603 8.56 Deemed dividends in specie ............................................................ 603

Interest on hybrid debt instruments as deemed dividend—s 8F ............ 603 Hybrid interest as deemed dividend—s 8FA ........................................ 603

8.57 Transitions: residence, HQ company—s 9H(3)(c)(iii) ..................... 603 8.58 Exemption of foreign and HQ dividends—s 10B(2)(d), (e) ............. 604 8.59 Trading stock—s 22(8) .................................................................... 604 8.60 Assets for shares—s 24BA(3)(b) ..................................................... 605 8.61 Transfer pricing—s 31(3)(i) and (a) ................................................ 606 8.62 Liquidation transactions— s 47(5) .................................................. 606 8.63 Livestock or produce—1st Sch para 11 ............................................ 607 8.64 Capital gains tax—8th Sch ............................................................... 608

Contents—principal sections


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Section 1(1) sv ‘dividend’ ................................................................................ 68 Section 1(1) sv ‘foreign dividend’ .................................................................... 78 Section 1(1) sv ‘foreign company’ ................................................................... 81 Section 1(1) sv ‘share’ ...................................................................................... 82 Section 31(3) .................................................................................................... 88 Section 64D sv ‘dividend’ ................................................................................ 91 Section 1(1) sv ‘company’ .............................................................................. 101 Section 1(1) sv ‘resident’ ................................................................................ 111 Section 1(1) sv ‘contributed tax capital’ ......................................................... 117 Section 8G ...................................................................................................... 127 Section 1(1) sv ‘taxable income’ .................................................................... 135 Section 26A .................................................................................................... 136 Section 1(1) sv ‘income’ ................................................................................ 136 Section 1(1) sv ‘gross income’, preamble ...................................................... 137 Section 1(1) sv ‘gross income’, para (n), proviso ........................................... 138 Section 1(1) sv ‘gross income’, para (k) ......................................................... 140 8th Sch para 35(3)(a) ....................................................................................... 141 Section 9(2)(a) ................................................................................................ 142 Section 9(4)(a) ................................................................................................ 143 Section 22(4) .................................................................................................. 146 Section 40C .................................................................................................... 146 8th Sch para 2(1) ............................................................................................. 149 Section 1(1) sv ‘portfolio of a collective investment scheme’ ....................... 154 Section 1(1) sv ‘person’ .................................................................................. 154 Section 1(1) sv ‘company’, para (e)(iii) ......................................................... 155 Section s 25BA(1) .......................................................................................... 156 Section 1(1) sv ‘gross income’, para (n) ......................................................... 158 Section 25BA(2) ............................................................................................. 159 Section 10(1)(iB) ............................................................................................ 160 Section 1(1) sv ‘foreign company’ ................................................................. 161 Section 1(1) sv ‘foreign dividend’ .................................................................. 161 Section 1(1) sv ‘REIT’ ..................................................................................... 165 Section s 25BB(6)(a) ...................................................................................... 166 Section s 25BB(6)(b) ...................................................................................... 167 Section 25BB(1) sv ‘controlled company’ ..................................................... 168 Section s 25BB(2) .......................................................................................... 168 Section 10(1)(k)(i)(aa) .................................................................................... 170 Section 25BB(6)(c) ......................................................................................... 172 Section 10(1)(k)(i) .......................................................................................... 175



—32—

Section 10(2)(b) .............................................................................................. 179 Section 1(1) sv ‘gross income’, para (a) ......................................................... 180 Section 1(1) sv ‘headquarter company’ .......................................................... 184 Section 9I(1) ................................................................................................... 184 Section 10(1)(k)(i)(aa) .................................................................................... 187 Section 10(1)(k)(i)(dd) ................................................................................... 191 Section 8C(7) sv ‘restricted equity instrument’ .............................................. 193 Section 1(1) sv ‘equity share’ ......................................................................... 194 Section 8C(7) .................................................................................................. 195 Section 8E(1) sv ‘hybrid equity instrument’ ................................................... 195 Section 8E(1) sv ‘preference share’ ................................................................ 197 Section 8EA(1) sv ‘preference share’ ............................................................. 197 Section 8E(1) sv ‘qualifying purpose’ ............................................................ 197 Section 8EA(1) sv ‘qualifying purpose’ ......................................................... 198 4th Sch para 1 sv ‘remuneration’ ..................................................................... 204 Section 10(1)(k)(i)(ee) .................................................................................... 209 Section 10(1)(k)(i)(ff) ..................................................................................... 213 Section 10(1)(k)(i)(gg) ................................................................................... 215 Section 1(1) sv ‘identical share’ ..................................................................... 216 Section 10(1)(k)(i)(hh) ................................................................................... 219 Section 24JB(2) .............................................................................................. 220 Section 24JB(1) sv ‘covered person’ .............................................................. 221 Section 10(1)(k)(i)(ii) ..................................................................................... 223 4th Sch para 1 sv ‘remuneration’ ..................................................................... 225 Section 10(1)(k)(i)(jj) ..................................................................................... 227 Section 10(1)(k)(i)(jj) ..................................................................................... 231 Section 10B(1) ‘foreign dividend’ .................................................................. 235 Section 10B(2)(a), (b) ..................................................................................... 243 Section 1(1) sv ‘listed share’ .......................................................................... 255 Section 11(a) ................................................................................................... 264 Section 11(x) .................................................................................................. 264 Section 23(g) .................................................................................................. 265 Section 1(1) sv ‘trade’ .................................................................................... 265 Section 23(q) .................................................................................................. 266 Section 1(1) sv ‘gross income’, para (c) ......................................................... 271 Section 8C(1A) ............................................................................................... 272 Section 44(6)(e) .............................................................................................. 285 8th Sch para 35(3)(a) ....................................................................................... 287 8th Sch para 74 sv ‘date of distribution’ .......................................................... 288 8th Sch para 75(1) ............................................................................................ 289 8th Sch para 1 sv ‘asset’ .................................................................................. 290 8th Sch para 31(1)(g) ....................................................................................... 291 8th Sch para 76(4) ............................................................................................ 291 Section 1(1) sv ‘return of capital’ ................................................................... 292 8th Sch para 76B .............................................................................................. 293 Section 1(1) sv ‘foreign return of capital’ ...................................................... 294 8th Sch para 77 ................................................................................................ 295 Section 9H(3)(c)(i),(ii) .................................................................................... 298



—33—

Section 66(13)(b) ............................................................................................ 299 Section 9H(3)(c)(iii) ....................................................................................... 299 Section 64EA .................................................................................................. 300 8th Sch para 64B(1) ......................................................................................... 301 Section 7(8)(a)—ITA ....................................................................................... 325 Section 10B(2)(a) ........................................................................................... 326 Section 7(8)(aA) ............................................................................................. 327 Section 25B(2A) ............................................................................................. 328 Section 25B(2B) ............................................................................................. 331 Section 8C(1)(b) ............................................................................................. 337 Section 8C(7) .................................................................................................. 337 Section 8C(7) sv ‘restricted equity instrument’ .............................................. 338 Section 8E(2) .................................................................................................. 348 Section 8E(2A) ............................................................................................... 348 Section 8E(1) sv ‘date of issue’ ...................................................................... 349 Section 8E(1) sv ‘equity instrument’ .............................................................. 350 Section 8E(1) sv ‘financial instrument’ .......................................................... 350 Section 8E(1) sv ‘preference share’ ................................................................ 356 Section 8EA(1) sv ‘preference share’ ............................................................. 357 Section 8E(1) sv ‘qualifying purpose’ ............................................................ 358 Section 8EA(1) sv ‘qualifying purpose’ ......................................................... 358 Section 8EA(2) ............................................................................................... 366 Section 8EA(2A) ............................................................................................ 367 Section 8EA(3) ............................................................................................... 367 Section 8EA(1) sv ‘enforcement right’........................................................... 369 Section 8EA(1) sv ‘equity instrument’’ .......................................................... 370 Section 8EA(1) sv ‘operating company’ ........................................................ 370 Section 8EA(1) sv ‘preference share’ ............................................................. 371 Section 8EA(1) sv ‘qualifying purpose’ ......................................................... 372 Section 8EA(1) sv ‘third-party backed share’ ................................................ 373 Section 1(1) sv ‘return of capital’ ................................................................... 373 Section 80L sv ‘arrangement’......................................................................... 380 Section 8F(3)(f) .............................................................................................. 380 Section 8F(2) .................................................................................................. 381 Section 8F(3) .................................................................................................. 382 Section 8F(1) sv ‘enforcement right’ .............................................................. 386 Section 8F(1) sv ‘hybrid debt instrument’ ...................................................... 387 Section 8F(1) sv ‘instrument’ ......................................................................... 389 Section 8F(1) sv ‘interest’ .............................................................................. 390 Section 24J(1) sv ‘interest’ ............................................................................. 391 Section 8F(1) sv ‘issue’ .................................................................................. 392 Section 8F(1) sv ‘redeem’ .............................................................................. 392 Section 8F(1) sv ‘third-party backed instrument’ ........................................... 393 Section 8FA(2) ............................................................................................... 400 Section 8FA(3) ............................................................................................... 401 Section 8FA(1) sv ‘hybrid interest’ ................................................................ 404 Section 8FA(1) sv ‘instrument’ ...................................................................... 405 Section 8FA(1) sv ‘interest’ ........................................................................... 406



—34—

Section 8FA(1) sv ‘issue’ ............................................................................... 407 Section 22B(2) ................................................................................................ 425 Section 22B(4) ................................................................................................ 428 Section 22B(3) ................................................................................................ 429 Section 22B(1) sv ‘deferral transaction’ ......................................................... 430 Section 22B(1) sv ‘exempt dividend’ ............................................................. 431 Section 22B(1) sv ‘extraordinary dividend’ ................................................... 432 Section 22B(1) sv ‘preference share’.............................................................. 434 Section 8EA(1) sv ‘preference share’ ............................................................. 434 Section 22B(1) sv ‘qualifying interest’ ........................................................... 434 Section 31(1) sv ‘associated enterprise’ ......................................................... 442 Section 1(1) sv ‘tax benefit’ ........................................................................... 443 Section 1(1) sv ‘tax’ ....................................................................................... 447 Section 103(2) ................................................................................................ 449 Section 1(1) sv ‘trust’ ..................................................................................... 451 Section 103(4) ................................................................................................ 452 Section 103(5) ................................................................................................ 453 8th Sch para 19(3)(b) ....................................................................................... 463 8th Sch para 19(1) ............................................................................................ 464 8th Sch para 19(3)(c) ....................................................................................... 466 8th Sch para 19(3)(a) ....................................................................................... 467 8th Sch para 38(1) ............................................................................................ 470 8th Sch para 38(2) ............................................................................................ 471 8th Sch para 43A ............................................................................................. 473 Section 41 sv ‘asset’ ....................................................................................... 476 8th Sch para 1 sv ‘asset’ .................................................................................. 477 Section 6quat(1) .............................................................................................. 479 Section 6quat(1C)(a) ....................................................................................... 481 Section 6quat(5) .............................................................................................. 482 Section 64D sv ‘dividend’ .............................................................................. 486 Section 64E(1) ................................................................................................ 493 Section 64E(2) ................................................................................................ 495 Section 64E(3) ................................................................................................ 499 Section 64E(4) ................................................................................................ 501 Section 64E(5) ................................................................................................ 506 Section 64E(6) ................................................................................................ 506 Section 64EA .................................................................................................. 515 Section 64D sv ‘beneficial owner’.................................................................. 517 Section 64EB(1) ............................................................................................. 517 Section 64EB(2) ............................................................................................. 521 Section 64EB(3) ............................................................................................. 523 Section 64EB(4) ............................................................................................. 524 Section 25B(1) ................................................................................................ 526 Section 64F(1) ................................................................................................ 533 Section 64F(2) ................................................................................................ 539 Section 64FA .................................................................................................. 539 Section 64FA(2) ............................................................................................. 542 Section 64FA(3) ............................................................................................. 544



—35—

Section 64G(1) ............................................................................................... 547 Section 64G(2) ............................................................................................... 550 Section 64G(3) ............................................................................................... 552 Section 108(2) ................................................................................................ 553 Section 64G(4) ............................................................................................... 554 Section 64H(1) ............................................................................................... 557 Section 64H(2) ............................................................................................... 558 Section 64H(3) ............................................................................................... 560 Section 64H(4) ............................................................................................... 562 Section 64I ...................................................................................................... 562 Section 64K(1)(a) ........................................................................................... 565 Section 64K(1)(b) ........................................................................................... 566 Section 64K(1)(c) ........................................................................................... 566 Section 64K(1A) ............................................................................................. 572 Section 64K(4) ............................................................................................... 573 Section 1(1) sv ‘prescribed’ ............................................................................ 573 Section 64K(6) ............................................................................................... 575 Section 64L(1) ................................................................................................ 577 Section 64L(1A) ............................................................................................. 580 Section 64L(2) ................................................................................................ 581 Section 64L(3) ................................................................................................ 583 Section 64L(4) ................................................................................................ 584 Section 64LA .................................................................................................. 585 Section 64M ................................................................................................... 587 Section 64N .................................................................................................... 589 Section 64D .................................................................................................... 591 Section 12Q(3) ............................................................................................... 599 Section 25BB(6)(c) ......................................................................................... 599 Section 26B(2) ................................................................................................ 600 10th Sch para 3(1) ........................................................................................... 600 Section 46(5) .................................................................................................. 601 Section 22(8) .................................................................................................. 604 Section 24BA(3)(b) ........................................................................................ 605 Section 47(5) .................................................................................................. 607 1st Sch para 11 ................................................................................................ 607


—36—

Index to sections and subsections


—37—



Peoples’ Republic of China art 10(3) ............................................................. 68 Section 1(1) sv ‘dividend’ ................................................................................ 68

ITA s 1(1) sv ‘dividend’ .................................................................................. 68 Section 1(1) sv ‘foreign dividend’ .................................................................... 78

ITA s 1(1) sv ‘foreign dividend’ ..................................................................... 78 ITA s 1(1) sv ‘dividend’, extract, annotated .................................................... 79 ITA s 1(1) sv ‘dividend’, extract, annotated .................................................... 80 ITA s 1(1) sv ‘dividend’, extract, annotated .................................................... 80 ITA s 1(1) sv ‘dividend’, extract ..................................................................... 81

Section 1(1) sv ‘foreign company’ ................................................................... 81 ITA s 1(1) sv ‘foreign company’ ..................................................................... 81 ITA s 1(1) sv ‘dividend’, extract ..................................................................... 81

Section 1(1) sv ‘share’ ...................................................................................... 82 ITA s 1(1) sv ‘share’ ....................................................................................... 82 ITA s 1(1) sv ‘dividend’, extract ..................................................................... 82 ITA s 1(1) sv ‘share’ ....................................................................................... 83 ITA s 1(1) sv ‘dividend’, extract ..................................................................... 84 ITA s 1(1) sv ‘dividend’, extract ..................................................................... 85 ITA s 1(1) sv ‘foreign dividend’, extract ......................................................... 85 ITA s 1(1) sv ‘dividend’, annotated................................................................. 87 ITA s 1(1) sv ‘dividend’, preamble ................................................................. 88

Section 31(3) .................................................................................................... 88 ITA s 31(3) ...................................................................................................... 88

Section 64D sv ‘dividend’ ................................................................................ 91 ITA s 64D sv ‘dividend’ .................................................................................. 91 ITA s 31(3), extract ......................................................................................... 92 ITA s 1(1) sv ‘dividend’, extract ..................................................................... 93 ITA s 1(1) sv ‘dividend’, extract ..................................................................... 94 ITA s 1(1) sv ‘dividend’, extract ..................................................................... 95 ITA s 1(1) sv ‘dividend’, extract, highlighted ................................................. 97 ITA s 1(1) sv ‘dividend’, extract, highlighted ................................................. 97

Section 1(1) sv ‘company’ .............................................................................. 101 ITA s 1(1) sv ‘company’ ............................................................................... 101 ITA s 1(1) sv ‘company’, extract, annotated ................................................. 102 ITA s 1(1) sv ‘company’, para (d) ................................................................. 103 ITA s 1(1) sv ‘share’ ..................................................................................... 104

Section 1(1) sv ‘resident’ ................................................................................ 111 ITA s 1(1) sv ‘resident’, extract..................................................................... 111 ITA s 1(1) sv ‘resident’, extract..................................................................... 112 ITA s 1(1) sv ‘resident’, extract..................................................................... 113



—38—

Republic of China, art 4 ............................................................................... 113 ITA s 1(1) sv ‘company’, extract, annotated ................................................. 115 ITA s 1(1) sv ‘foreign company’ ................................................................... 115 ITA s 1(1) sv ‘foreign dividend’, extract ....................................................... 115 ITA s 1(1) sv ‘resident’, extract ..................................................................... 116

Section 1(1) sv ‘contributed tax capital’ ......................................................... 117 ITA s 1(1) sv ‘contributed tax capital’ .......................................................... 117 ITA s 1(1) sv ‘contributed tax capital’, extract .............................................. 119 ITA s 1(1) sv ‘share’ ...................................................................................... 119 ITA s 1(1) sv ‘dividend’, extract ................................................................... 120 ITA s 1(1) sv ‘foreign dividend’ .................................................................... 120 ITA s 1(1) sv ‘contributed tax capital’, para (a), extract ............................... 121 ITA s 1(1) sv ‘contributed tax capital’, para (b), extract ............................... 121 ITA s 1(1) sv ‘contributed tax capital’, para (b)(i) ........................................ 122 ITA s 1(1) sv ‘contributed tax capital’, para (b)(ii) ....................................... 122 ITA s 1(1) sv ‘contributed tax capital’, para (b)(iii)(aa) ............................... 122 ITA s 1(1) sv ‘contributed tax capital’, para (b)(iii)(bb) ............................... 123 ITA s 1(1) sv ‘contributed tax capital’, para (b)(cc) ...................................... 123 ITA s 1(1) sv ‘contributed tax capital’, para (b), extract ............................... 123 ITA s 1(1) sv ‘contributed tax capital’, para (b)(aa) ..................................... 124 ITA s 1(1) sv ‘contributed tax capital’, para (b)(bb) ..................................... 124 ITA s 1(1) sv ‘contributed tax capital’, para (b)(cc) ...................................... 124 ITA s 1(1) sv ‘contributed tax capital’, proviso ............................................. 124 ITA s 1(1) sv ‘contributed tax capital’, para (a), annotated ........................... 125

Section 8G ...................................................................................................... 127 ITA s 8G(1) ................................................................................................... 127 ITA s 8G(2) ................................................................................................... 127 ITA s 8G(3) ................................................................................................... 128 ITA s 8G(4) ................................................................................................... 128 ITA s 1(1) sv ‘foreign dividend’ .................................................................... 131 ITA s 1(1) sv ‘foreign dividend’, extract ....................................................... 131 ITA s 1(1) sv ‘foreign dividend’, extract ....................................................... 131 ITA s 1(1) sv ‘company’, para (e)(ii) ............................................................ 132 ITA s 1(1) sv ‘foreign dividend’, extract ....................................................... 132

Section 1(1) sv ‘taxable income’ .................................................................... 135 ITA s 1(1) sv ‘taxable income’, annotated .................................................... 135

Section 26A .................................................................................................... 136 ITA s 26A ...................................................................................................... 136

Section 1(1) sv ‘income’ ................................................................................. 136 ITA s 1(1) sv ‘income’ .................................................................................. 136

Section 1(1) sv ‘gross income’, preamble ...................................................... 137 ITA s 1(1) sv ‘gross income’, preamble ........................................................ 137

Section 1(1) sv ‘gross income’, para (n), proviso ........................................... 138 ITA s 1(1) sv ‘gross income’, preamble, para (n), proviso ............................ 138

Section 1(1) sv ‘gross income’, para (k) ......................................................... 140 ITA s 1(1) sv ‘gross income’, para (k) ........................................................... 140

8th Sch para 35(3)(a) ....................................................................................... 141 ITA 8th Sch para 35(3)(a) ............................................................................. 141 ITA s 1(1) sv ‘gross income’, para (k) ........................................................... 141



—39—

Section 9(2)(a) ................................................................................................ 142 ITA s 9(2)(a) ................................................................................................. 142

Section 9(4)(a) ................................................................................................ 143 ITA s 9(4)(a) ................................................................................................. 143 ITA s 1(1) sv ‘gross income’, para (k) ........................................................... 143 ITA s 1(1) sv ‘dividend’, para (ii) ................................................................. 145

Section 22(4) .................................................................................................. 146 ITA s 22(4) .................................................................................................... 146

Section 40C .................................................................................................... 146 ITA s 40C, current text .................................................................................. 146 CA s 47(1) ..................................................................................................... 147 CA s 47(2) ..................................................................................................... 147 ITA s 1(1) sv ‘dividend’, para (i) .................................................................. 148 ITA s 1(1) sv ‘dividend’ ................................................................................ 148 ITA s 1(1) sv ‘dividend’, para (iii) ................................................................ 148

8th Sch para 2(1) ............................................................................................. 149 ITA 8th Sch para 2(1) ..................................................................................... 149 ITA 8th Sch para 2(2) ..................................................................................... 150 ITA s 1(1) sv ‘foreign dividend’, extract ....................................................... 150 ITA s 1(1) sv ‘foreign dividend’, extract ....................................................... 151 ITA s 1(1) sv ‘foreign dividend’, extract ....................................................... 151 CISCA s 1 sv ‘collective investment scheme’ ................................................ 153 CISCA s 1 sv ‘portfolio’................................................................................. 154

Section 1(1) sv ‘portfolio of a collective investment scheme’ ....................... 154 ITA s 1(1) sv ‘portfolio of a collective investment scheme’ ......................... 154

Section 1(1) sv ‘person’ .................................................................................. 154 ITA s 1(1) sv ‘person’ ................................................................................... 154

Section 1(1) sv ‘company’, para (e)(iii) ......................................................... 155 ITA s 1(1) sv ‘company’, para (e)(iii) ........................................................... 155

Section s 25BA(1) .......................................................................................... 156 ITA s 25BA(1)............................................................................................... 156 ITA s 25BA(1), preamble .............................................................................. 157 ITA s 25BA(1)(a) .......................................................................................... 157 ITA s 25BA(1)(b) .......................................................................................... 158

Section 1(1) sv ‘gross income’, para (n) ......................................................... 158 ITA s 1(1) sv ‘gross income’, para (n) .......................................................... 158 ITA s 1(1) sv ‘taxable income’, annotated .................................................... 159

Section 25BA(2) ............................................................................................. 159 ITA s 25BA(2)............................................................................................... 159 ITA s 1(1) sv ‘taxable income’, annotated .................................................... 160

Section 10(1)(iB) ............................................................................................ 160 ITA s 10(1)(iB) .............................................................................................. 160 ITA s 1(1) sv ‘company’, para (e)(ii) ............................................................ 161

Section 1(1) sv ‘foreign company’ ................................................................. 161 ITA s 1(1) sv ‘foreign company’ ................................................................... 161

Section 1(1) sv ‘foreign dividend’ .................................................................. 161 ITA s 1(1) sv ‘foreign dividend’ ................................................................... 161 ITA s 1(1) sv ‘gross income’, para (k) ........................................................... 162

Section 1(1) sv ‘REIT’ ..................................................................................... 165



—40—

ITA s 1(1) sv ‘REIT’ ....................................................................................... 165 ITA s 1(1) sv ‘company’, para (e)(iii) ........................................................... 166

Section s 25BB(6)(a) ...................................................................................... 166 ITA s 25BB(6)(a) .......................................................................................... 167

Section s 25BB(6)(b) ...................................................................................... 167 ITA s 25BB(6)(b) .......................................................................................... 167

Section 25BB(1) sv ‘controlled company’ ..................................................... 168 ITA s 25BB(1) sv ‘controlled company’ ....................................................... 168

Section s 25BB(2) ........................................................................................... 168 ITA s 25BB(2)(a) .......................................................................................... 168 ITA s 25BB(2)(b) .......................................................................................... 168 ITA s 1(1) sv ‘gross income’, para (k) ........................................................... 169

Section 10(1)(k)(i)(aa) .................................................................................... 170 ITA s 10(1)(k)(i)(aa) ..................................................................................... 170 ITA s 10(1)(k)(i)(aa), extract, highlighted..................................................... 171 ITA s 1(1) sv ‘taxable income’, annotated .................................................... 171 ITA s 25BB(6)(a) .......................................................................................... 172 ITA s 25BB(6)(b) .......................................................................................... 172

Section 25BB(6)(c) ......................................................................................... 172 ITA s 25BB(6)(c) .......................................................................................... 172 ITA s 10(1)(k)(i)(aa) ..................................................................................... 173

Section 10(1)(k)(i) .......................................................................................... 175 ITA s 10(1)(k)(i), preamble ........................................................................... 176 ITA s 10(1)(k)(i), preamble, extract .............................................................. 176 ITA s 1(1) sv ‘income’ .................................................................................. 176 ITA s 1(1) sv ‘taxable income’, annotated .................................................... 176 ITA 8th Sch para 35(3)(a) ............................................................................. 177

Section 10(2)(b) .............................................................................................. 179 ITA s 10(2) .................................................................................................... 179

Section 1(1) sv ‘gross income’, para (a) ......................................................... 180 ITA s 1(1) sv ‘gross income’, para (a) .......................................................... 180 ITA s 1(1) sv ‘taxable income’, annotated .................................................... 181 ITA s 10(1)(k)(i), preamble ........................................................................... 183 ITA s 1(1) sv ‘dividend’, extract ................................................................... 183

Section 1(1) sv ‘headquarter company’ .......................................................... 184 ITA s 1(1) sv ‘headquarter company’ ............................................................ 184

Section 9I(1) ................................................................................................... 184 ITA s 9I(1) ..................................................................................................... 184 ITA s 1(1) sv ‘taxable income’, annotated .................................................... 185

Section 10(1)(k)(i)(aa) .................................................................................... 187 ITA s 10(1)(k)(i)(aa) ..................................................................................... 187 ITA s 10(1)(k)(i)(aa), extract, highlighted..................................................... 188 ITA s 1(1) sv ‘dividend’, extract ................................................................... 189

Section 10(1)(k)(i)(dd) ................................................................................... 191 ITA s 10(1)(k)(i)(dd) ..................................................................................... 191 ITA s 10(1)(k)(i)(dd), extract, highlighted..................................................... 192

Section 8C(7) sv ‘restricted equity instrument’ .............................................. 193 ITA s 8C(7) sv ‘restricted equity instrument’ ................................................ 193

Section 1(1) sv ‘equity share’ ......................................................................... 194



—41—

ITA s 1(1) sv ‘equity share’ ........................................................................... 194 Section 8C(7) .................................................................................................. 195

ITA s 8C(7) sv ‘equity instrument’ ............................................................... 195 Section 8E(1) sv ‘hybrid equity instrument’ .................................................. 195

ITA s 8E(1) sv ‘hybrid equity instrument’ .................................................... 195 Section 8E(1) sv ‘preference share’ ................................................................ 197

ITA s 8E(1) sv ‘preference share’ ................................................................. 197 Section 8EA(1) sv ‘preference share’ ............................................................. 197

ITA s 8EA(1) sv ‘preference share’ .............................................................. 197 Section 8E(1) sv ‘qualifying purpose’ ............................................................ 197

ITA s 8E(1) sv ‘qualifying purpose’.............................................................. 197 Section 8EA(1) sv ‘qualifying purpose’ ......................................................... 198

ITA s 8EA(1) sv ‘qualifying purpose’ ........................................................... 198 ITA s 8E(1) sv ‘hybrid equity instrument’ .................................................... 200 ITA s 10(1)(k)(i)(dd), extract ........................................................................ 201 ITA s 8E(1) sv ‘hybrid equity instrument’, para (a) ...................................... 202 ITA s 8E(1) sv ‘hybrid equity instrument’, para (b)(i) .................................. 202 ITA s 8E(1) sv ‘hybrid equity instrument’, para (b)(ii) ................................. 202 ITA s 8E(1) sv ‘hybrid equity instrument’, para (c) ...................................... 203 ITA s 8E(1) sv ‘hybrid equity instrument’, para (d) ...................................... 203 ITA s 8E(1) sv ‘hybrid equity instrument’ .................................................... 203

4th Sch para 1 sv ‘remuneration’ ..................................................................... 204 ITA 4th Sch para 1 sv ‘remuneration’, para (g) .............................................. 204

Section 10(1)(k)(i)(ee) .................................................................................... 209 ITA s 10(1)(k)(i)(ee) ...................................................................................... 209 ITA s 10(1)(k)(i)(ee), extract, highlighted ..................................................... 210

Section 10(1)(k)(i)(ff) ..................................................................................... 213 ITA s 10(1)(k)(i)(ff) ....................................................................................... 213

Section 10(1)(k)(i)(gg) ................................................................................... 215 ITA s 10(1)(k)(i)(gg) ..................................................................................... 215 ITA s 10(1)(k)(i)(gg), proviso ....................................................................... 216

Section 1(1) sv ‘identical share’ ..................................................................... 216 ITA s 1(1) sv ‘identical share’ ....................................................................... 216

Section 10(1)(k)(i)(hh) ................................................................................... 219 ITA s 10(1)(k)(i)(hh) ..................................................................................... 219

Section 24JB(2) .............................................................................................. 220 ITA s 24JB(2) ................................................................................................ 220 ITA s 1(1) sv ‘identical share’ ....................................................................... 221

Section 24JB(1) sv ‘covered person’ .............................................................. 221 ITA s 24JB(1) sv ‘covered person’................................................................ 221

Section 10(1)(k)(i)(ii) ..................................................................................... 223 ITA s 10(1)(k)(i)(ii) ....................................................................................... 223 ITA s 10(1)(k)(i)(ii), extracted, highlighted .................................................. 224

4th Sch para 1 sv ‘remuneration’ ..................................................................... 225 ITA 4th Sch para 1 sv ‘remuneration’, para (g) .............................................. 225

Section 10(1)(k)(i)(jj) ..................................................................................... 227 ITA s 10(1)(k)(i)(jj) ....................................................................................... 227 ITA 4th Sch para 1 sv ‘remuneration’, para (g) .............................................. 228

Section 10(1)(k)(i)(jj) ..................................................................................... 231



—42—

ITA s 10(1)(k)(i)(kk) ...................................................................................... 231 ITA 4th Sch para 1 sv ‘remuneration’, para (g) .............................................. 233

Section 10B(1) ‘foreign dividend’ .................................................................. 235 ITA s 10B(1).................................................................................................. 235 ITA s 1(1) sv ‘foreign dividend’ .................................................................... 235 ITA s 1(1) sv ‘headquarter company’ ............................................................ 236 ITA s 9I(1) ..................................................................................................... 236 ITA s 10B(3).................................................................................................. 239

Section 10B(2)(a), (b) ..................................................................................... 243 ITA s 10B(2).................................................................................................. 243 ITA s 10B(4).................................................................................................. 244 ITA s 10B(2)(a) ............................................................................................. 245 ITA s 10B(2), first proviso ............................................................................ 246 ITA s 10B(2), second proviso ........................................................................ 246 ITA s 10B(2).................................................................................................. 246 ITA s 10B(2), first proviso ............................................................................ 247 ITA s 10B(4)(a) ............................................................................................. 248 ITA s 10B(4)(b) ............................................................................................. 249 ITA s 1(1) sv ‘company’, para (e)(ii) ............................................................ 249 ITA s 10B(2).................................................................................................. 251 ITA s 10B(2).................................................................................................. 255

Section 1(1) sv ‘listed share’ .......................................................................... 255 ITA s 1(1) sv ‘listed share’ ............................................................................ 255 ITA s 10B(5).................................................................................................. 257 ITA s 10B(6).................................................................................................. 257 ITA s 10B(5).................................................................................................. 258 ITA s 10B(6)(a) ............................................................................................. 258 ITA s 10B(6)(a), highlighted ......................................................................... 259 ITA s 10B(6)(b) ............................................................................................. 259 ITA s 10(1)(k)(i)(jj) ....................................................................................... 260

Section 11(a) ................................................................................................... 264 ITA s 11(a) .................................................................................................... 264

Section 11(x) .................................................................................................. 264 ITA s 11(x) .................................................................................................... 264

Section 23(g) .................................................................................................. 265 ITA s 23(g) .................................................................................................... 265

Section 1(1) sv ‘trade’ .................................................................................... 265 ITA s 1(1) sv ‘trade’ ...................................................................................... 265

Section 23(q) .................................................................................................. 266 ITA s 23(q) .................................................................................................... 266 ITA s 1(1) sv ‘dividend’, preamble ............................................................... 267 ITA s 9(2)(a).................................................................................................. 267 ITA s 1(1) sv ‘foreign dividend’, preamble ................................................... 267 ITA s 1(1) sv ‘foreign company’ ................................................................... 267 ITA s 9(4)(a).................................................................................................. 268 ITA s 1(1) sv ‘gross income’, preamble ........................................................ 268 ITA s 1(1) sv ‘gross income’, para (k) ........................................................... 269 ITA s 9(2)(a).................................................................................................. 269 ITA s 9(4)(a).................................................................................................. 269



—43—

ITA s 10(1)(k)(i) ............................................................................................ 270 ITA s 1(1) sv ‘gross income’, para (n) .......................................................... 271 ITA s 11(x) .................................................................................................... 271

Section 1(1) sv ‘gross income’, para (c) ......................................................... 271 ITA s 1(1) sv ‘gross income’, para (c) ........................................................... 272

Section 8C(1A) ............................................................................................... 272 ITA s 8C(1A) ................................................................................................. 272 ITA s 8C(1A)(a) ............................................................................................ 273 ITA s 8C(1A)(b) ............................................................................................ 273 ITA s 8C(1A)(c) ............................................................................................ 274 ITA s 10(1)(k)(i)(ii) ....................................................................................... 277 ITA s 10B(5) ................................................................................................. 278 ITA s 10B(6)(a) ............................................................................................. 278 ITA s 10B(6)(b) ............................................................................................. 279 ITA s 10(1)(k)(i)(jj) ....................................................................................... 279 ITA s 1(1) sv ‘gross income’, para (k) ........................................................... 281 ITA s 9(2)(a) ................................................................................................. 281 ITA s 9(4)(a) ................................................................................................. 281 ITA s 10(1)(k)(i) ............................................................................................ 282 ITA s 10B(5) ................................................................................................. 283 ITA s 10B(6)(a) ............................................................................................. 284

Section 44(6)(e) .............................................................................................. 285 ITA s 44(6)(e) ................................................................................................ 285

8th Sch para 35(3)(a) ....................................................................................... 287 ITA 8th Sch para 35(3)(a) .............................................................................. 287

8th Sch para 74 sv ‘date of distribution’ .......................................................... 288 ITA 8th Sch para 74 sv ‘date of distribution’ ................................................. 288

8th Sch para 75(1) ........................................................................................... 289 ITA 8th Sch para 75(1) ................................................................................... 289 ITA 8th Sch para 75(1)(a) .............................................................................. 289 ITA 8th Sch para 75(1)(b) .............................................................................. 290

8th Sch para 1 sv ‘asset’ .................................................................................. 290 ITA 8th Sch para 1 sv ‘asset’.......................................................................... 290 ITA s 1(1) sv ‘share’ ..................................................................................... 290

8th Sch para 31(1)(g) ....................................................................................... 291 ITA 8th Sch para 31(1)(g) .............................................................................. 291

8th Sch para 76(4) ........................................................................................... 291 ITA 8th Sch para 76(4) ................................................................................... 291

Section 1(1) sv ‘return of capital’ ................................................................... 292 ITA s 1(1) sv ‘return of capital’ .................................................................... 292

8th Sch para 76B ............................................................................................. 293 ITA 8th Sch para 76B(1) ................................................................................ 293 ITA 8th Sch para 76B(2) ................................................................................ 294 ITA 8th Sch para 76B(3) ................................................................................ 294

Section 1(1) sv ‘foreign return of capital’ ...................................................... 294 ITA s 1(1) sv ‘foreign return of capital’ ........................................................ 294

8th Sch para 77 ................................................................................................ 295 ITA 8th Sch para 77(1) ................................................................................... 295 ITA 8th Sch para 77(2) ................................................................................... 296



—44—

ITA s 1(1) sv ‘resident’, extract ..................................................................... 297 ITA s 1(1) sv ‘resident’, extract ..................................................................... 297

Section 9H(3)(c)(i),(ii) .................................................................................... 298 ITA s 9H(3)(c)(i), (ii) .................................................................................... 298 ITA s 9H(3)(c)(ii) .......................................................................................... 298

Section 66(13)(b) ............................................................................................ 299 ITA s 66(13)(b) .............................................................................................. 299

Section 9H(3)(c)(iii) ....................................................................................... 299 ITA s 9H(3)(c)(iii) ......................................................................................... 299

Section 64EA .................................................................................................. 300 ITA s 64EA .................................................................................................... 300 ITA s 9H(3)(f)................................................................................................ 301

8th Sch para 64B(1) ......................................................................................... 301 ITA 8th Sch para 64B(1) ................................................................................ 301 ITA s 10B(2).................................................................................................. 302 s 7(3), early version ...................................................................................... 317 s 64C, obsolete provision ............................................................................. 320

Section 7(8)(a)—ITA ....................................................................................... 325 ITA s 7(8)(a) .................................................................................................. 325

Section 10B(2)(a) ........................................................................................... 326 ITA s 10B(2)(a) ............................................................................................. 326

Section 7(8)(aA) ............................................................................................. 327 ITA s 7(8)(aA) ............................................................................................... 327

Section 25B(2A) ............................................................................................. 328 ITA s 25B(2A) ............................................................................................... 328 ITA s 10B(2)(a) ............................................................................................. 330

Section 25B(2B) ............................................................................................. 331 ITA s 25B(2B) ............................................................................................... 331 ITA s 8C(1)(a) ............................................................................................... 333 ITA s 10(1)(k)(i) ............................................................................................ 335

Section 8C(1)(b) ............................................................................................. 337 ITA s 8C(1)(b) ............................................................................................... 337

Section 8C(7) .................................................................................................. 337 ITA s 8C(7) sv ‘equity instrument’ ............................................................... 337

Section 8C(7) sv ‘restricted equity instrument’ .............................................. 338 ITA s 8C(7) sv ‘restricted equity instrument’ ................................................ 338 ITA s 8E(1) sv ‘hybrid equity instrument’ .................................................... 342 ITA s 8E(2) .................................................................................................... 345 ITA s 1(1) sv ‘taxable income’, annotated .................................................... 346 ITA s 1(1) sv ‘gross income’, para (n) .......................................................... 347

Section 8E(2) .................................................................................................. 348 ITA s 8E(2) .................................................................................................... 348

Section 8E(2A) ............................................................................................... 348 ITA s 8E(2A) ................................................................................................. 348

Section 8E(1) sv ‘date of issue’ ...................................................................... 349 ITA s 8E(1) sv ‘date of issue’ ........................................................................ 349

Section 8E(1) sv ‘equity instrument’ .............................................................. 350 ITA s 8E(1) sv ‘equity instrument’ ................................................................ 350

Section 8E(1) sv ‘financial instrument’ .......................................................... 350



—45—

ITA s 8E(1) sv ‘financial instrument’ ............................................................ 350 ITA s 8E(1) sv ‘hybrid equity instrument’ .................................................... 351 ITA s 8E(1) sv ‘hybrid equity instrument’, para (a) ...................................... 352 ITA s 1(1) sv ‘share’ ..................................................................................... 352 ITA s 1(1) sv ‘equity share’ ........................................................................... 353 ITA s 8E(1) sv ‘hybrid equity instrument’, para (b), preamble ..................... 353 ITA s 8E(1) sv ‘hybrid equity instrument’, para (b) ...................................... 354 ITA s 8E(1) sv ‘hybrid equity instrument’, para (c) ...................................... 355 ITA s 8E(1) sv ‘hybrid equity instrument’, para (d) ...................................... 356 ITA s 8E(1) sv ‘hybrid equity instrument’, para (e) ...................................... 356

Section 8E(1) sv ‘preference share’ ................................................................ 356 ITA s 8E(1) sv ‘preference share’ ................................................................. 356

Section 8EA(1) sv ‘preference share’ ............................................................. 357 ITA s 8EA(1) sv ‘preference share’ .............................................................. 357 ITA s 8E(1) sv ‘hybrid equity instrument’, para (c) ...................................... 357

Section 8E(1) sv ‘qualifying purpose’ ............................................................ 358 ITA s 8E(1) sv ‘qualifying purpose’.............................................................. 358

Section 8EA(1) sv ‘qualifying purpose’ ......................................................... 358 ITA s 8EA(1) sv ‘qualifying purpose’ ........................................................... 358 ITA s 8EA(1) sv ‘qualifying purpose’, preamble .......................................... 359 ITA s 8EA(1) sv ‘qualifying purpose’, para (a) ............................................ 360 ITA s 8EA(1) sv ‘qualifying purpose’, para (b) ............................................ 360 ITA s 8EA(1) sv ‘qualifying purpose’, para (c) ............................................ 360 ITA s 8EA(1) sv ‘qualifying purpose’, para (d) ............................................ 361 ITA s 8EA(1) sv ‘third-party backed share’ .................................................. 363 ITA s 8EA(2) ................................................................................................. 364 ITA s 1(1) sv ‘taxable income’, annotated .................................................... 365 ITA s 1(1) sv ‘gross income’, para (n) .......................................................... 365

Section 8EA(2) ............................................................................................... 366 ITA s 8EA(2) ................................................................................................. 366

Section 8EA(2A) ............................................................................................ 367 ITA s 8EA(2A) .............................................................................................. 367

Section 8EA(3) ............................................................................................... 367 ITA s 8EA(3)(a) ............................................................................................ 367 ITA s 8EA(3)(b) ............................................................................................ 367 ITA s 8EA(3)(a) ............................................................................................ 368 ITA s 8EA(1) sv ‘third-party backed share’ .................................................. 369

Section 8EA(1) sv ‘enforcement right’........................................................... 369 ITA s 8EA(1) sv ‘enforcement right’ ............................................................ 369

Section 8EA(1) sv ‘equity instrument’’ .......................................................... 370 ITA s 8EA(1) sv ‘equity instrument’ ............................................................. 370

Section 8EA(1) sv ‘operating company’ ........................................................ 370 ITA s 8EA(1) sv ‘operating company’ .......................................................... 370

Section 8EA(1) sv ‘preference share’ ............................................................. 371 ITA s 8EA(1) sv ‘preference share’ .............................................................. 371

Section 8EA(1) sv ‘qualifying purpose’ ......................................................... 372 ITA s 8EA(1) sv ‘qualifying purpose’ ........................................................... 372

Section 8EA(1) sv ‘third-party backed share’ ................................................ 373 ITA s 8EA(1) sv ‘third-party backed share’ .................................................. 373



—46—

Section 1(1) sv ‘return of capital’ ................................................................... 373 ITA s 1(1) sv ‘return of capital’ ..................................................................... 373 ITA s 1(1) sv ‘foreign return of capital’ ........................................................ 374 ITA s 8F(1) sv ‘hybrid debt instrument’ ........................................................ 377 ITA s 8F(2) .................................................................................................... 379

Section 80L sv ‘arrangement’ ......................................................................... 380 ITA s 80L sv ‘arrangement’ .......................................................................... 380

Section 8F(3)(f) .............................................................................................. 380 ITA s 8F(3)(f) ................................................................................................ 380

Section 8F(2) .................................................................................................. 381 ITA s 8F(2) .................................................................................................... 381

Section 8F(3) .................................................................................................. 382 ITA s 8F(3) .................................................................................................... 382 ITA s 8F(3)(a) ............................................................................................... 384 ITA s 8F(3)(b) ............................................................................................... 384 ITA s 8F(3)(c)................................................................................................ 384 ITA s 8F(3)(d) ............................................................................................... 384 ITA s 8F(3)(e)................................................................................................ 385 ITA s 8F(3)(f) ................................................................................................ 385 ITA s 8F(1) sv ‘hybrid debt instrument’, para (b) ......................................... 385

Section 8F(1) sv ‘enforcement right’ .............................................................. 386 ITA s 8F(1) sv ‘enforcement right’ ............................................................... 386

Section 8F(1) sv ‘hybrid debt instrument’ ...................................................... 387 ITA s 8F(1) sv ‘hybrid debt instrument’ ........................................................ 387 ITA s 8F(1) sv ‘hybrid debt instrument’, para (a) ......................................... 388 ITA s 8F(1) sv ‘hybrid debt instrument’, para (b) ......................................... 388 ITA s 8F(1) sv ‘hybrid debt instrument’, para (c) ......................................... 388

Section 8F(1) sv ‘instrument’ ......................................................................... 389 ITA s 8F(1) sv ‘instrument’ ........................................................................... 389

Section 8F(1) sv ‘interest’ .............................................................................. 390 ITA s 8F(1) sv ‘interest’ ................................................................................ 390

Section 24J(1) sv ‘interest’ ............................................................................. 391 ITA s 24J(1) sv ‘interest’ ............................................................................... 391

Section 8F(1) sv ‘issue’ .................................................................................. 392 ITA s 8F(1) sv ‘issue’ .................................................................................... 392

Section 8F(1) sv ‘redeem’ .............................................................................. 392 ITA s 8F(1) sv ‘redeem’ ................................................................................ 392

Section 8F(1) sv ‘third-party backed instrument’ ........................................... 393 ITA s 8F(1) sv ‘third-party backed instrument’ ............................................. 393 ITA s 8FA(1) sv ‘hybrid interest’ .................................................................. 397 ITA s 8FA(2) ................................................................................................. 398 ITA s 8FA(1) sv ‘hybrid interest’, para (a)(i) ................................................ 398 ITA s 8FA(1) sv ‘hybrid interest’, para (a)(ii) ............................................... 399 ITA s 8FA(1) sv ‘hybrid interest’, para (b) ................................................... 399

Section 8FA(2) ............................................................................................... 400 ITA s 8FA(2) ................................................................................................. 400

Section 8FA(3) ............................................................................................... 401 ITA s 8FA(3) ................................................................................................. 401 ITA s 8FA(3) ................................................................................................. 401



—47—

ITA s 8FA(3)(a) ............................................................................................ 402 ITA s 8FA(3)(b) ............................................................................................ 402 ITA s 8FA(3)(c)............................................................................................. 403 ITA s 8F(3)(d) ............................................................................................... 403 ITA s 8FA(3)(e)............................................................................................. 404

Section 8FA(1) sv ‘hybrid interest’ ................................................................ 404 ITA s 8FA(1) sv ‘hybrid interest’ .................................................................. 404

Section 8FA(1) sv ‘instrument’ ...................................................................... 405 ITA s 8FA(1) sv ‘instrument’ ........................................................................ 405 ITA s 8F(1) sv ‘instrument’ ........................................................................... 405

Section 8FA(1) sv ‘interest’ ........................................................................... 406 ITA s 8FA(1) sv ‘interest’ ............................................................................. 406 ITA s 24J(1) sv ‘interest’ ............................................................................... 406

Section 8FA(1) sv ‘issue’ ............................................................................... 407 ITA s 8FA(1) ................................................................................................. 407 ITA s 22B(2) .................................................................................................. 413

Section 22B(2) ................................................................................................ 425 ITA s 22B(2) .................................................................................................. 425 ITA s 22B(2)(b) ............................................................................................. 426 ITA s 22B(2)(a) ............................................................................................. 427 ITA s 22B(2)(a) ............................................................................................. 427 ITA s 22B(2) .................................................................................................. 428 ITA s 22B(2), proviso .................................................................................... 428

Section 22B(4) ................................................................................................ 428 ITA s 22B(4) .................................................................................................. 428 ITA s 1(1) sv ‘equity share’ ........................................................................... 429 ITA s 22B(2), proviso .................................................................................... 429

Section 22B(3) ................................................................................................ 429 ITA s 22B(3) .................................................................................................. 429

Section 22B(1) sv ‘deferral transaction’ ......................................................... 430 ITA s 22B(1) sv ‘deferral transaction’ ........................................................... 430

Section 22B(1) sv ‘exempt dividend’ ............................................................. 431 ITA s 22B(1) sv ‘exempt dividend’ ............................................................... 431

Section 22B(1) sv ‘extraordinary dividend’ ................................................... 432 ITA s 22B(1) sv ‘extraordinary dividend’ ..................................................... 432 ITA s 22B(1) sv ‘extraordinary dividend’, para (b) ....................................... 432 ITA s 22B(1) sv ‘extraordinary dividend’, para (a) ....................................... 433 ITA s 22B(1) sv ‘extraordinary dividend’, proviso ....................................... 433

Section 22B(1) sv ‘preference share’ ............................................................. 434 ITA s 22B(1) sv ‘preference share’ ............................................................... 434

Section 8EA(1) sv ‘preference share’ ............................................................. 434 ITA s 8EA(1) sv ‘preference share’ .............................................................. 434

Section 22B(1) sv ‘qualifying interest’........................................................... 434 ITA s 22B(1) sv ‘qualifying interest’ ............................................................ 434 ITA s 22B(1) sv ‘qualifying interest’, preamble ............................................ 435 ITA s 22B(1) sv ‘qualifying interest’, para (a) .............................................. 435 ITA s 22B(1) sv ‘qualifying interest’, para (b) .............................................. 435 ITA s 31(1) sv ‘affected transaction’ ............................................................. 437 ITA s 31(2) .................................................................................................... 438



—48—

ITA s 31(2) .................................................................................................... 440 ITA s 31(2)(a)................................................................................................ 440 ITA s 31(1) sv ‘affected transaction’, para (b) .............................................. 441 ITA s 31(1) sv ‘affected transaction’, para (a) .............................................. 441

Section 31(1) sv ‘associated enterprise’ ......................................................... 442 ITA s 1(1) sv ‘associated enterprise’ ............................................................. 442 ITA s 31(2)(b)(i) ............................................................................................ 443 ITA s 31(1) sv ‘affected transaction’, para (b) .............................................. 443 ITA s 31(2)(b)(ii) ........................................................................................... 443

Section 1(1) sv ‘tax benefit’ ........................................................................... 443 ITA s 1(1) sv ‘tax benefit’ ............................................................................. 443 ITA s 80A ...................................................................................................... 445 ITA s 1(1) sv ‘tax benefit’ ............................................................................. 446

Section 1(1) sv ‘tax’ ....................................................................................... 447 ITA s 1(1) sv ‘tax’ ......................................................................................... 447

Section 103(2) ................................................................................................ 449 ITA s 103(2) .................................................................................................. 449 ITA s 103(2), annotated ................................................................................. 450

Section 1(1) sv ‘trust’ ..................................................................................... 451 ITA s 1(1) sv ‘trust’ ....................................................................................... 451

Section 103(4) ................................................................................................ 452 ITA s 103(4) .................................................................................................. 452

Section 103(5) ................................................................................................ 453 ITA s 103(5) .................................................................................................. 453 ITA s 22B(1) sv ‘exempt dividend’ ............................................................... 463

8th Sch para 19(3)(b) ....................................................................................... 463 ITA 8th Sch para 19(3)(b) .............................................................................. 463

8th Sch para 19(1) ............................................................................................ 464 ITA 8th Sch para 19(1) ................................................................................... 464 ITA 8th Sch para 19(1), preamble .................................................................. 465 ITA 8th Sch para 19(1), preamble .................................................................. 465 ITA 8th Sch para 19(1)(a) .............................................................................. 465 ITA 8th Sch para 19(1)(b) .............................................................................. 466

8th Sch para 19(3)(c) ....................................................................................... 466 ITA 8th Sch para 19(3)(c)............................................................................... 466

8th Sch para 19(3)(a) ....................................................................................... 467 ITA 8th Sch para 19(3)(a) .............................................................................. 467 ITA 8th Sch para 38(1) ................................................................................... 469

8th Sch para 38(1) ............................................................................................ 470 ITA 8th Sch para 38(1) ................................................................................... 470

8th Sch para 38(2) ............................................................................................ 471 ITA 8th Sch para 38(2) ................................................................................... 471

8th Sch para 43A ............................................................................................. 473 ITA 8th Sch para 43A(1) ................................................................................ 473 ITA 8th Sch para 43A(1) sv ‘deferral transaction’ ......................................... 473 ITA 8th Sch para 43A(1) sv ‘exempt dividend’ ............................................. 474 ITA 8th Sch para 43A(1) sv ‘extraordinary dividend’ .................................... 474 ITA 8th Sch para 43A(1) sv ‘preference share’ .............................................. 474 ITA 8th Sch para 43A(1) sv ‘qualifying interest’ ........................................... 474



—49—

ITA 8th Sch para 43A(2) ................................................................................ 475 ITA 8th Sch para 43A(3) ................................................................................ 475 ITA 8th Sch para 43A(4) ................................................................................ 476

Section 41 sv ‘asset’ ....................................................................................... 476 ITA s 41 sv ‘asset’ ......................................................................................... 476

8th Sch para 1 sv ‘asset’ .................................................................................. 477 ITA 8th Sch para 1 sv ‘asset’.......................................................................... 477

Section 6quat(1) ............................................................................................. 479 ITA s 6quat(1) ............................................................................................... 479

Section 6quat(1C)(a) ...................................................................................... 481 ITA s 6quat(1C)(a) ........................................................................................ 481

Section 6quat(5) ............................................................................................. 482 ITA s 6quat(5) ............................................................................................... 482

Section 64D sv ‘dividend’ .............................................................................. 486 ITA s 64D sv ‘dividend’ ................................................................................ 486 ITA s 64D sv ‘dividend’ ................................................................................ 487 ITA s 1(1) sv ‘dividend’ ................................................................................ 488 ITA s 1(1) sv ‘foreign dividend’ ................................................................... 488

Section 64E(1) ................................................................................................ 493 ITA s 64E(1)(a) ............................................................................................. 493 ITA s 64E(1)(b) ............................................................................................. 493 ITA s 64E(1)(a) ............................................................................................. 495

Section 64E(2) ................................................................................................ 495 ITA s 64E(2) .................................................................................................. 495 ITA s 64E(2)(a) ............................................................................................. 496 ITA s 64E(2)(a)(i) ......................................................................................... 497 ITA s 64E(2)(a)(ii) ........................................................................................ 497 ITA s 64E(2)(b) ............................................................................................. 498

Section 64E(3) ................................................................................................ 499 ITA s 64E(3) .................................................................................................. 499 ITA s 64E(3)(a) ............................................................................................. 499 ITA s 64E(3)(b) ............................................................................................. 499 ITA s 1(1) sv ‘dividend’, preamble ............................................................... 500 ITA s 1(1) sv ‘foreign dividend’, preamble ................................................... 500

Section 64E(4) ................................................................................................ 501 ITA s 64E(4)(a) ............................................................................................. 501 ITA s 64E(4)(b) ............................................................................................. 501 ITA s 64E(4)(c) ............................................................................................. 502 ITA s 64E(4)(d) ............................................................................................. 502 ITA s 64E(4)(e) ............................................................................................. 502 ITA s 64E(4)(a), extract ................................................................................ 502 ITA s 64E(4)(a), extract ................................................................................ 503 ITA s 64E(4)(a), extract ................................................................................ 503 ITA s 64E(4)(b)(i) ......................................................................................... 504 ITA s 64E(4)(b)(ii) ........................................................................................ 504 ITA s 64E(4)(c) ............................................................................................. 504 ITA s 64E(4)(d) ............................................................................................. 504 ITA s 64E(4)(e) ............................................................................................. 504

Section 64E(5) ................................................................................................ 506



—50—

ITA s 64E(5) .................................................................................................. 506 Section 64E(6) ................................................................................................ 506

ITA s 64E(6) .................................................................................................. 506 ITA s 64E(4)(a) ............................................................................................. 511 ITA s 64B(2)(g) ............................................................................................. 512

Section 64EA .................................................................................................. 515 ITA s 64EA .................................................................................................... 515

Section 64D sv ‘beneficial owner’.................................................................. 517 ITA s 64D sv ‘beneficial owner’ ................................................................... 517

Section 64EB(1) ............................................................................................. 517 ITA s 64EB(1) ............................................................................................... 517 ITA s 64EB(1)(b) .......................................................................................... 520 ITA s 64EB(1), extract .................................................................................. 520 ITA s 64EB(1), proviso ................................................................................. 520

Section 64EB(2) ............................................................................................. 521 ITA s 64EB(2) ............................................................................................... 521 ITA s 64EB(2)(a), extract .............................................................................. 522 ITA s 64EB(2), extract .................................................................................. 522

Section 64EB(3) ............................................................................................. 523 ITA s 64EB(3) ............................................................................................... 523 ITA s 64EB(3)(c) ........................................................................................... 523 ITA s 64EB(3), extract .................................................................................. 524

Section 64EB(4) ............................................................................................. 524 ITA s 64EB(4) ............................................................................................... 524 ITA s 64EA(a) ............................................................................................... 525 ITA s 64D sv ‘beneficial owner’ ................................................................... 525

Section 25B(1) ................................................................................................ 526 ITA s 25B(1).................................................................................................. 526 ITA s 64E(2)(a) ............................................................................................. 527

Section 64F(1) ................................................................................................ 533 ITA s 64F(1) .................................................................................................. 533 ITA s 64F(1)(a) ............................................................................................. 534 ITA s 64F(1)(b) ............................................................................................. 535 ITA s 64F(1)(l) .............................................................................................. 535 ITA s 64F(1)(m) ............................................................................................ 535 ITA s 64F(1)(c).............................................................................................. 536 ITA s 64F(1)(i) .............................................................................................. 536 ITA s 64F(1)(o) ............................................................................................. 536 ITA s 64F(1)(j) .............................................................................................. 537 ITA s 64F(1)(h) ............................................................................................. 537 ITA s 64F(1)(d) ............................................................................................. 538 ITA s 64F(1)(e).............................................................................................. 538 ITA s 64F(1)(f) .............................................................................................. 538 ITA s 64F(1)(g) ............................................................................................. 538 ITA s 64F(1)(d) ............................................................................................. 538

Section 64F(2) ................................................................................................ 539 ITA s 64F(2) .................................................................................................. 539

Section 64FA .................................................................................................. 539 ITA s 64FA(1) ............................................................................................... 539



—51—

ITA s 64FA(1)(a) .......................................................................................... 540 ITA s 64FA(1)(b) .......................................................................................... 541 ITA s 64FA(1)(c)........................................................................................... 541 ITA s 64FA(1)(d) .......................................................................................... 542

Section 64FA(2) ............................................................................................. 542 ITA s 64FA(2) ............................................................................................... 542 ITA s 64FA(2), preamble .............................................................................. 543 ITA s 64FA(2)(a), (b) .................................................................................... 543

Section 64FA(3) ............................................................................................. 544 ITA s 64FA(3) ............................................................................................... 544

Section 64G(1) ............................................................................................... 547 ITA s 64G(1) ................................................................................................. 547 ITA s 64G(1) ................................................................................................. 548 ITA s 64G(1) ................................................................................................. 548 ITA s 64G(1) ................................................................................................. 548 ITA s 64G(1) ................................................................................................. 549 ITA s 64G(1), extract .................................................................................... 549

Section 64G(2) ............................................................................................... 550 ITA s 64G(2) ................................................................................................. 550 ITA s 64G(2)(a)(i) ......................................................................................... 551 ITA s 64G(2)(a)(ii) ........................................................................................ 551 ITA s 64G(2)(b), (c) ...................................................................................... 551

Section 64G(3) ............................................................................................... 552 ITA s 64G(3) ................................................................................................. 552

Section 108(2) ................................................................................................ 553 ITA s 108(2) .................................................................................................. 553 ITA s 64G(3)(a)............................................................................................. 553 ITA s 64G(3)(b)............................................................................................. 554

Section 64G(4) ............................................................................................... 554 ITA s 64G(4) ................................................................................................. 554

Section 64H(1) ............................................................................................... 557 ITA s 64H(1) ................................................................................................. 557

Section 64H(2) ............................................................................................... 558 ITA s 64H(2) ................................................................................................. 558 ITA s 64H(2)(a)(i) ......................................................................................... 558 ITA s 64H(2)(a)(ii) ........................................................................................ 559 ITA s 64H(2)(b), (c) ...................................................................................... 559 ITA s 64F(1)(o) ............................................................................................. 560

Section 64H(3) ............................................................................................... 560 ITA s 64H(3) ................................................................................................. 560 ITA s 64H(3)(a)............................................................................................. 561 ITA s 64H(3)(b)............................................................................................. 561

Section 64H(4) ............................................................................................... 562 ITA s 64H(4) ................................................................................................. 562

Section 64I ...................................................................................................... 562 ITA s 64I ....................................................................................................... 562

Section 64K(1)(a) ........................................................................................... 565 ITA s 64K(1)(a)............................................................................................. 565

Section 64K(1)(b) ........................................................................................... 566



—52—

ITA s 64K(1)(b) ............................................................................................. 566 Section 64K(1)(c) ........................................................................................... 566

ITA s 64K(1)(c) ............................................................................................. 566 ITA s 64K(1)(c) ............................................................................................. 567 IA s 2 sv ‘month’ .......................................................................................... 567 CA s 12(8) ..................................................................................................... 572

Section 64K(1A) ............................................................................................. 572 ITA s 64K(1A) .............................................................................................. 572

Section 64K(4) ................................................................................................ 573 ITA s 64K(4) ................................................................................................. 573

Section 1(1) sv ‘prescribed’ ............................................................................ 573 ITA s 1(1) sv ‘prescribed’ ............................................................................. 573 ITA s 64K(4)(a) ............................................................................................. 574 ITA s 64K(4)(b) ............................................................................................. 574 ITA s 64K(4), extract..................................................................................... 574

Section 64K(6) ................................................................................................ 575 ITA s 64K(6) ................................................................................................. 575

Section 64L(1) ................................................................................................ 577 ITA s 64L(1) .................................................................................................. 577 ITA s 64L(1)(a) ............................................................................................. 578 ITA s 64L(1)(b) ............................................................................................. 578 ITA s 64L(1)(c) ............................................................................................. 579 ITA s 64L(1)(c) ............................................................................................. 579 ITA s 64L(1), extract ..................................................................................... 579

Section 64L(1A) ............................................................................................. 580 ITA s 64L(1A) ............................................................................................... 580 ITA s 64L(1A)(a) .......................................................................................... 580 ITA s 64L(1A)(b) .......................................................................................... 580 ITA s 64L(1A), extract .................................................................................. 581 ITA s 64L(1A), proviso ................................................................................. 581

Section 64L(2) ................................................................................................ 581 ITA s 64L(2) .................................................................................................. 581 ITA s 64L(2), preamble ................................................................................. 582 ITA s 64L(2)(a) ............................................................................................. 582 ITA s 64L(2)(b) ............................................................................................. 582 ITA s 64L(1), preamble ................................................................................. 583

Section 64L(3) ................................................................................................ 583 ITA s 64L(3) .................................................................................................. 583

Section 64L(4) ................................................................................................ 584 ITA s 64L(4) .................................................................................................. 584 ITA s 64L(1)(a) ............................................................................................. 584 ITA s 64L(1A)(a) .......................................................................................... 584

Section 64LA .................................................................................................. 585 ITA s 64LA ................................................................................................... 585 ITA s 64LA(a) ............................................................................................... 586 ITA s 64LA(a) ............................................................................................... 586 ITA s 64LA(b) ............................................................................................... 586 ITA s 64LA, extract ....................................................................................... 586 ITA s 64LA, extract ....................................................................................... 587



—53—

Section 64M ................................................................................................... 587 ITA s 64M(1) ................................................................................................ 587 ITA s 64M(1A) .............................................................................................. 588 ITA s 64M(2) ................................................................................................ 588

Section 64N .................................................................................................... 589 ITA s 64N(1) ................................................................................................. 589 ITA s 64N(2) ................................................................................................. 589 ITA s 64N(3) ................................................................................................. 589 ITA s 64N(4) ................................................................................................. 589 ITA s 64N(5) ................................................................................................. 589

Section 64D .................................................................................................... 591 ITA s 64D ...................................................................................................... 591 ITA s 64D sv ‘beneficial owner’ ................................................................... 591 ITA s 64D sv ‘dividend’ ................................................................................ 591 ITA s 64D sv ‘dividend cycle’ ...................................................................... 592 ITA s 64D sv ‘effective date’ ........................................................................ 592 ITA s 64D sv ‘regulated intermediary’ .......................................................... 592 ITA s 64D sv ‘STC credit’ .............................................................................. 592 ITA s 64D sv ‘beneficial owner’ ................................................................... 593 ITA s 1(1) sv ‘foreign dividend’ ................................................................... 595 ITA s 1(1) sv ‘dividend’ ................................................................................ 595 ITA s 1(1) sv ‘listed share’ ............................................................................ 596 ITA s 64D sv ‘regulated intermediary’ .......................................................... 596

Section 12Q(3) ............................................................................................... 599 ITA s 12Q(3) ................................................................................................. 599

Section 25BB(6)(c) ......................................................................................... 599 ITA s 25BB(6)(c) .......................................................................................... 599

Section 26B(2) ................................................................................................ 600 ITA s 26B(2) ................................................................................................. 600

10th Sch para 3(1) ........................................................................................... 600 ITA 10th Sch para 3(1) ................................................................................... 600

Section 46(5) .................................................................................................. 601 ITA s 46(5) .................................................................................................... 601 ITA s 8F(2) .................................................................................................... 603 ITA s 8FA(2) ................................................................................................. 603 ITA s 9H(3)(c)(iii) ......................................................................................... 603 ITA s 10B(2) ................................................................................................. 604

Section 22(8) .................................................................................................. 604 ITA s 22(8), extract ....................................................................................... 604

Section 24BA(3)(b) ........................................................................................ 605 ITA s 24BA(3) ............................................................................................... 605 ITA s 31(3) .................................................................................................... 606

Section 47(5) .................................................................................................. 607 ITA s 47(5) .................................................................................................... 607

1st Sch para 11 ................................................................................................ 607 ITA 1st Sch para 11, extract ........................................................................... 607


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Contents—extracts from the Income Tax Act


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Income Tax Act 1—‘dividend’ (s 1(1)) 68 Income Tax Act 2—‘foreign dividend’ (s 1(1)) 78 Income Tax Act 3—‘foreign company’ (s 1(1)) 81 Income Tax Act 4—‘share’ (s 1(1)) 82 Income Tax Act 5—consequences of transfer pricing (s 31(3)) 88 Income Tax Act 6—‘dividend’ (s 64D) 91 Income Tax Act 7—‘company’ (s 1(1)) 101 Income Tax Act 8—‘resident’ (s 1(1)) 111 Income Tax Act 9—‘contributed tax capital’ (s 1(1)) 117 Income Tax Act 10—shares issued to a group company (s 8G) 127 Income Tax Act 11—‘taxable income’ (s 1(1)) 135 Income Tax Act 12—inclusion of taxable capital gain (s 26A) 136 Income Tax Act 13—‘income’ (s 1(1)) 136 Income Tax Act 14—‘gross income’, preamble (s 1(1)) 137 Income Tax Act 15—‘gross income’, para (n), proviso (s 1(1)) 138 Income Tax Act 16—‘gross income’, para (k) (s 1(1)) 140 Income Tax Act 17—gross income exclusion (8th Sch para 35(3)(a)) 141 Income Tax Act 18—domestic source of dividends (s 9(2)(a)) 142 Income Tax Act 19—foreign source of dividends (s 9(4)(a)) 143 Income Tax Act 20—trading stock for no consideration (s 22(4)) 146 Income Tax Act 21—shares, options for no consideration (s 40C) 146 Income Tax Act 22—application of the CGT (8th Sch para 2(1)) 149 Income Tax Act 23—‘portfolio of a [CIS]’ (s 1(1)) 154 Income Tax Act 24—‘person’ (s 1(1)) 154 Income Tax Act 25—‘company’, para (e)(iii) (s 1(1)) 155 Income Tax Act 26—CIS pass-through rule (s 25BA(1)) 156 Income Tax Act 27—‘gross income’, para (n) (s 1(1)) 158 Income Tax Act 28—hedge fund CIS (s 25BA(2)) 159 Income Tax Act 29—exempt amounts already taxed (s 10(1)(iB)) 160 Income Tax Act 30—‘foreign company’ (s 1(1)) 161 Income Tax Act 31—‘foreign dividend’ (s 1(1)) 161 Income Tax Act 32—‘REIT’ (s 1(1)) 165 Income Tax Act 33—taxation of REIT interest (s 25BB(6)(a)) 166 Income Tax Act 34—REIT debenture interest (s 25BB(6)(b)) 167 Income Tax Act 35—‘controlled company’ (s 25BB(1)) 168 Income Tax Act 36—deduction of distributions (s 25BB(2)) 168 Income Tax Act 37—REIT or its subsidiary (s 10(1)(k)(i)(aa)) 170 Income Tax Act 38—REIT interest is dividend (s 25BB(6)(c)) 172 Income Tax Act 39—exempt dividends (s 10(1)(k)(i)) 175



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Income Tax Act 40—the annuity exclusion (s 10(2)(b)) 179 Income Tax Act 41—‘gross income’, para (a) (s 1(1)) 180 Income Tax Act 42—‘headquarter company’ (s 1(1)) 184 Income Tax Act 43—election to be headquarter company (s 9I(1)) 184 Income Tax Act 44—REIT or its subsidiary (s 10(1)(k)(i)(aa)) 187 Income Tax Act 45—restricted equity instrument (s 10(1)(k)(i)(dd)) 191 Income Tax Act 46—‘restricted equity instrument’ (s 8C(7)) 193 Income Tax Act 47—‘equity share’ (s 1(1)) 194 Income Tax Act 48—‘equity instrument’ (s 8C(7)) 195 Income Tax Act 49—‘hybrid equity instrument’ (s 8E(1)) 195 Income Tax Act 50—‘preference share’ (s 8E(1)) 197 Income Tax Act 51—‘preference share’ (s 8EA(1)) 197 Income Tax Act 52—‘qualifying purpose’ (s 8E(1)) 197 Income Tax Act 53—‘qualifying purpose’ (s 8EA(1)) 198 Income Tax Act 54—‘remuneration’ (4th Sch para 1) 204 Income Tax Act 55—derived by company (s 10(1)(k)(i)(ee)) 209 Income Tax Act 56—on borrowed shares (s 10(1)(k)(i)(ff)) 213 Income Tax Act 57—holding & borrowing share (s 10(1)(k)(i)(gg)) 215 Income Tax Act 58—‘identical share’ (s 1(1)) 216 Income Tax Act 59—mismatches (s 10(1)(k)(i)(hh)) 219 Income Tax Act 60—marking to market (s 24JB(2)) 220 Income Tax Act 61—‘covered person’ (s 24JB(1)) 221 Income Tax Act 62—services rendered (s 10(1)(k)(i)(ii)) 223 Income Tax Act 63—‘remuneration’ (4th Sch para 1) 225 Income Tax Act 64—restricted equity instruments (s 10(1)(k)(i)(jj)) 227 Income Tax Act 65—restricted equity instruments (s 10(1)(k)(i)(jj)) 231 Income Tax Act 66—‘foreign dividend’ (s 10B(1)) 235 Income Tax Act 67—dividends-tax-equivalence (s 10B(3)) 239 Income Tax Act 68—participation, foreign co (s 10B(2)(a), (b)) 243 Income Tax Act 69—the s 10B(4) clog (s 10B(4)) 244 Income Tax Act 70—CFC exemption (s 10B(2)(c)) 251 Income Tax Act 71—listed share exemptions (s 10B(2)(d), (e)) 255 Income Tax Act 72—‘listed share’ (s 1(1)) 255 Income Tax Act 73—the exemptions-overrides (s 10B(5), (6)) 257 Income Tax Act 74—general deduction formula (s 11(a)) 264 Income Tax Act 75—other deductions from income (s 11(x)) 264 Income Tax Act 76—the ‘trade’ requirement (s 23(g)) 265 Income Tax Act 77—‘trade’ (s 1(1)) 265 Income Tax Act 78—prohibited deductions (s 23(q)) 266 Income Tax Act 79—‘gross income, para (c) (s 1(1)) 271 Income Tax Act 80—when s 8C(1) applies (s 8C(1A)) 272 Income Tax Act 81—amalgamation transactions (s 44(6)(e)) 285 Income Tax Act 82—reduction of proceeds (8th Sch para 35(3)(a)) 287 Income Tax Act 83—‘date of distribution’ (8th Sch para 74) 288 Income Tax Act 84—distributions in kind (8th Sch para 75(1)) 289 Income Tax Act 85—‘asset’ (8th Sch para 1) 290 Income Tax Act 86—default market value (8th Sch para 31(1)(g)) 291 Income Tax Act 87—return of capital report (8th Sch para 76(4)) 291 Income Tax Act 88—‘return of capital’ (s 1(1)) 292 Income Tax Act 89—reduction of base cost (8th Sch para 76B) 293



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Income Tax Act 90—‘foreign return of capital’ (s 1(1)) 294 Income Tax Act 91—termination of company (8th Sch para 77) 295 Income Tax Act 92—company ceasing (s 9H(3)(c)(i),(ii)) 298 Income Tax Act 93—returns & years of assessment (s 66(13)(b)) 299 Income Tax Act 94—company ceasing (s 9H(3)(c)(iii)) 299 Income Tax Act 95—liability for dividends tax (s 64EA) 300 Income Tax Act 96—participation excl (8th Sch para 64B(1)) 301 Income Tax Act 97—diversion to nonresident (s 7(8)(a)) 325 Income Tax Act 98—participation exemption (s 10B(2)(a)) 326 Income Tax Act 99—the CFC participation exemption (s 7(8)(aA)) 327 Income Tax Act 100—distribution, nonresident trust (s 25B(2A)) 328 Income Tax Act 101—the CFC participation exemption (s 25B(2B)) 331 Income Tax Act 102—exclusions from s 8C(1)(a) (s 8C(1)(b)) 337 Income Tax Act 103—‘equity instrument’ (s 8C(7)) 337 Income Tax Act 104—‘restricted equity instrument’ (s 8C(7)) 338 Income Tax Act 105—dividends are income (s 8E(2)) 348 Income Tax Act 106—excluded hybrids (s 8E(2A)) 348 Income Tax Act 107—‘date of issue’ (s 8E(1)) 349 Income Tax Act 108—‘equity instrument’ (s 8E(1)) 350 Income Tax Act 109—‘financial instrument’ (s 8E(1)) 350 Income Tax Act 110—‘preference share’ (s 8E(1)) 356 Income Tax Act 111—‘preference share’ (s 8EA(1)) 357 Income Tax Act 112—‘qualifying purpose’ (s 8E(1)) 358 Income Tax Act 113—‘qualifying purpose’ (s 8E(1)) 358 Income Tax Act 114—dividends are income (s 8EA(2)) 366 Income Tax Act 115—excluded 3rd party backed shares (s 8EA(2A))367 Income Tax Act 116—determination disregardings (s 8EA(3)) 367 Income Tax Act 117—‘enforcement right’ (s 8EA(1)) 369 Income Tax Act 118—‘equity instrument’ (s 8EA(1)) 370 Income Tax Act 119—‘operating company’ (s 8EA(1)) 370 Income Tax Act 120—‘preference share’ (s 8EA(1)) 371 Income Tax Act 121—‘qualifying purpose’ (s 8EA(1)) 372 Income Tax Act 122—‘third-party backed share’ (s 8EA(1)) 373 Income Tax Act 123—‘return of capital’ (s 1(1)) 373 Income Tax Act 124—‘arrangement’ (s 80L) 380 Income Tax Act 125—work for pals (s 8F(3)(f)) 380 Income Tax Act 126—interest on a hybrid debt instrument (s 8F(2)) 381 Income Tax Act 127—exclusions (s 8F(3)) 382 Income Tax Act 128—‘enforcement right’ (s 8F(1)) 386 Income Tax Act 129—‘hybrid debt instrument’ (s 8F(1)) 387 Income Tax Act 130—‘instrument’ (s 8F(1)) 389 Income Tax Act 131—‘interest’ (s 8F(1)) 390 Income Tax Act 132—‘interest’ (s 24J(1)) 391 Income Tax Act 133—‘issue’ (s 8F(1)) 392 Income Tax Act 134—‘redeem’ (s 8F(1)) 392 Income Tax Act 135—‘third-party backed instrument’ (s 8F(1)) 393 Income Tax Act 136—hybrid interest (s 8FA(2)) 400 Income Tax Act 137—exclusions (s 8FA(3)) 401 Income Tax Act 138—‘hybrid interest’ (s 8FA(1)) 404 Income Tax Act 139—‘instrument’ (s 8FA(1)) 405



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Income Tax Act 140—‘interest’ (s 8FA(1)) 406 Income Tax Act 141—‘ issue’ (s 8FA(1)) 407 Income Tax Act 142—pre-sale exempt dividends (s 22B(2)) 425 Income Tax Act 143—issue of shares is deemed disposal (s 22B(4)) 428 Income Tax Act 144—sale after deferral transaction (s 22B(3)) 429 Income Tax Act 145—‘deferral transaction’ (s 22B(1)) 430 Income Tax Act 146—‘exempt dividend’ (s 22B(1)) 431 Income Tax Act 147—‘extraordinary dividend’ (s 22B(1)) 432 Income Tax Act 148—‘preference share’ (s 22B(1)) 434 Income Tax Act 149—‘preference share’ (s 8E(1)) 434 Income Tax Act 150—‘qualifying interest’ (s 22B(1)) 434 Income Tax Act 151—‘associated enterprise’ (s 31(1)) 442 Income Tax Act 152—‘tax benefit’ (s 1(1)) 443 Income Tax Act 153—‘tax’ (s 1(1)) 447 Income Tax Act 154—abusing an assessed loss (s 103(2)) 449 Income Tax Act 155—‘trust’ (s 1(1)) 451 Income Tax Act 156—rebuttable presumption (s 103(4)) 452 Income Tax Act 157—Commissioner’s powers (s 103(5)) 453 Income Tax Act 158—‘exempt dividend’ (8th Sch para 19(3)(b)) 463 Income Tax Act 159—disposal of shares (8th Sch para 19(1)) 464 Income Tax Act 160—‘extra/exempt div’ (8th Sch para 19(3)(c)) 466 Income Tax Act 161—‘period of 18 months’ (8th Sch para 19(3)(a)) 467 Income Tax Act 162—irregular disposals (8th Sch para 38(1)) 470 Income Tax Act 163—para 38 exclusions (8th Sch para 38(2)) 471 Income Tax Act 164—disposal of shares (8th Sch para 43A) 473 Income Tax Act 165—‘asset’ (s 41) 476 Income Tax Act 166—‘asset’ (8th Sch para 1) 477 Income Tax Act 167—rebate, deduction, foreign taxes (s 6quat(1)) 479 Income Tax Act 168—the elective deduction (s 6quat(1C)(a)) 481 Income Tax Act 169—six-year statute of limitations (s 6quat(5)) 482 Income Tax Act 170—‘dividend’ (s 64D) 486 Income Tax Act 171—the charging provision (s 64E(1)) 493 Income Tax Act 172—date of payment of dividend (s 64E(2)) 495 Income Tax Act 173—valuing a dividend in kind (s 64E(3)) 499 Income Tax Act 174—debts as dividends (s 64E(4)) 501 Income Tax Act 175—currency conversion (s 64E(5)) 506 Income Tax Act 176—deemed payment by withholder (s 64E(6)) 506 Income Tax Act 177—liability for tax (s 64EA) 515 Income Tax Act 178—‘beneficial owner’ (s 64D) 517 Income Tax Act 179—deemed beneficial owners (s 64EB(1)) 517 Income Tax Act 180—borrowed, collateral listed shares (s 64EB(2)) 521 Income Tax Act 181—listed shares acquired post-div (s 64EB(3)) 523 Income Tax Act 182—‘resale agreement’ (s 64EB(4)) 524 Income Tax Act 183—income of trusts and beneficiaries (s 25B(1)) 526 Income Tax Act 184—exemption for cash dividends (s 64F(1)) 533 Income Tax Act 185—exemption for cash dividends (s 64F(2)) 539 Income Tax Act 186—exemption for dividends in kind (s 64FA) 539 Income Tax Act 187—reduced-rate withholding (s 64FA(2)) 542 Income Tax Act 188—validity of paperwork (s 64FA(3)) 544 Income Tax Act 189—the withholding imperative (s 64G(1)) 547



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Income Tax Act 190—exclusions (s 64G(2)) 550 Income Tax Act 191—reduced-rate withholding (s 64G(3)) 552 Income Tax Act 192—binding effect of tax treaties (s 108(2)) 553 Income Tax Act 193—validity of paperwork (s 64G(4)) 554 Income Tax Act 194—withholding by intermediary (s 64H(1)) 557 Income Tax Act 195—exclusions (s 64H(2)) 558 Income Tax Act 196—reduced-rate withholding (s 64H(3)) 560 Income Tax Act 197—validity of paperwork (s 64H(4)) 562 Income Tax Act 198—withholding by insurer (s 64I) 562 Income Tax Act 199—who pays the tax (s 64K(1)(a)) 565 Income Tax Act 200—who pays the tax (s 64K(1)(b)) 566 Income Tax Act 201—who pays the tax (s 64K(1)(c)) 566 Income Tax Act 202—dividends tax returns (s 64K(1A)) 572 Income Tax Act 203—submission of declarations (s 64K(4)) 573 Income Tax Act 204—‘prescribed’ (s 1(1)) 573 Income Tax Act 205—interest (s 64K(6)) 575 Income Tax Act 206—refunds on cash dividends (s 64L(1)) 577 Income Tax Act 207—rebates (s 64L(1A)) 580 Income Tax Act 208—refund by company (s 64L(2)) 581 Income Tax Act 209—recovery from Commissioner (s 64L(3)) 583 Income Tax Act 210—statute of limitations (s 64L(4)) 584 Income Tax Act 211—refunds on dividends in kind (s 64LA) 585 Income Tax Act 212—refunds by intermediaries (s 64M) 587 Income Tax Act 213—rebate of foreign tax (s 64N) 589 Income Tax Act 214—definitions (s 64D) 591 Income Tax Act 215—international shipping exemption (s 12Q(3)) 599 Income Tax Act 216—REIT interest is dividend (s 25BB(6)(c)) 599 Income Tax Act 217—oil and gas companies exemption (s 26B(2)) 600 Income Tax Act 218—oil and gas companies (10th Sch para 3(1)) 600 Income Tax Act 219—trading stock distributed (s 22(8)) 604 Income Tax Act 220—shares issued for asset (s 24BA(3)(b)) 605 Income Tax Act 221—disregarded disposal, capital return (s 47(5)) 607 Income Tax Act 222—shares issued asset (1st Sch para 11) 607


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Contents—external material


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Contents—external material


External 1—treaty with China (art 10(3)) 68 External 2—SARS ‘Comprehensive Guide to Dividends Tax’ 82 External 3—SARS ‘Comprehensive Guide to Dividends Tax’ 83 External 4—explanatory memorandum: s 31(3) dividends 90 External 5—SARS ‘Comprehensive Guide to Dividends Tax’ 94 External 6—SARS ‘Comprehensive Guide to Dividends Tax’ 96 External 7—SARS Interpretation Note 6: effective management 113 External 8—treaty with China (art 4) 113 External 9—SARS ‘Comprehensive Guide to Dividends Tax’ 125 External 10—explanatory memorandum: purpose of s 8G 128 External 11—Companies Act (s 47) 147 External 12—Collective Investment Schemes Control Act (s 1) 153 External 13—Collective Investment Schemes Control Act (s 1) 154 External 14—explanatory memo: purpose of s 10(1)(k)(i)(kk) 232 External 15—explanatory memo: purpose of s 22B(2) (2011) 415 External 16—explanatory memo: purpose of s 22B(2) (2017) 415 External 17—explanatory memo: purpose of s 22B(2) (2018) 418 External 18—explanatory memo: purpose of s 22B(2) (2018) 421 External 19—explanatory memo: purpose of s 22B(2) (2019) 422 External 20—SARS ‘Comprehensive Guide to Dividends Tax’ 480 External 21—explanatory memorandum: s 6quat(5) 482 External 22—SARS ‘Comprehensive Guide to Dividends Tax’ 500 External 23—SARS ‘Comprehensive Guide to Dividends Tax’ 500 External 24—SARS ‘Comprehensive Guide to Dividends Tax’ 505 External 25—SARS ‘Comprehensive Guide to Dividends Tax’ 516 External 26—explanatory memorandum: s 64EB 518 External 27—SARS ‘Comprehensive Guide to Dividends Tax’ 527 External 28—Interpretation Act (s 2) 567 External 29—SARS ‘Comprehensive Guide to Dividends Tax’ 568 External 30—Copyright Act (s 12(8)) 572 External 31—SARS ‘Comprehensive Guide to Dividends Tax’ 575


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Contents—Tax Shock, Horror newsletter


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Contents—Tax Shock, Horror newsletter


From TSH 1—drafting the definition of ‘dividend’ 70 From TSH 2—drafting the definition of ‘dividend’ 71 From TSH 3—on the history of the definition of ‘dividend’ 73 From TSH 4—more on the history of the definition 74 From TSH 5—more on the history of the definition 75 From TSH 6—more on the history of the definition 77 From TSH 7—associations, universitas, bodies of persons 104 From TSH 8—unincorporated associations & bodies of persons 106 From TSH 9—universitas 107 From TSH 10—‘association of persons’ 109 From TSH 11—income from a REIT 173 From TSH 12—annuity from exempt interest or dividends 181 From TSH 13—the Tradehold fiasco 302 From TSH 14—dividends and the corporate physical exit tax 304 From TSH 15—Section 8F 393 From TSH 16—Section 8F, continued 395 From TSH 17—‘direct’ v ‘indirect’ 454 From TSH 18—‘cession’ 457 From TSH 19—cession of future rights 458 From TSH 20—‘cession’ 459 From TSH 21—cession of divided-streams 459 From TSH 22—dividends tax as cock-up 485 From TSH 23—loans-are-dividends madness 507 From TSH 24—avoiding the dividends tax 508 From TSH 25—loans are dividends 511 From TSH 26—‘net of tax’ contracts 513 From TSH 27—trust taxation: s 25B and the withholding taxes 528 From TSH 28—trust taxation: s 25B and the dividends tax 529 From TSH 29—payment by cheque 568 From TSH 30—supervening impossibility of performance 570


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Contents—case law


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Contents—case law


Case law 1—Endumeni Municipality (1) 310 Case law 2—Endumeni Municipality (2) 311 Case law 3—Endumeni Municipality (3) 313 Case law 4—Daniels v Scribante 314 Case law 5—Glen Anil v SIR 315 Case law 6—Hleka v Johannesburg City Council 316 Case law 7—Olley v Maasdorp 316 Case law 8—Ovenstone v CIR 317 Case law 9—CSARS v Airworld 320


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Chapter 1: Nature of dividends—what is a ‘dividend’?


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CHAPTER 1

Nature of dividends

What is a ‘dividend’?

1.1 As commonly understood Bloomsbury English Dictionary New Edition (2004) defines ‘dividend’ in the presently relevant context—of a shareholder’s share of profit—as

company profits paid pro rata to shareholders, either in cash or in shares.

The definition in Black’s Law Dictionary Ninth Edition Bryan A Garner editor in chief is almost identical.

Yet it has been a long time since domestic tax law has displayed any concern with the payment of profits as uniquely characterizing a dividend. The focus has fallen, rather, upon the process involved, which is best identified as the distribution of an amount made by a company, raising issues of due process and the character or capacity of the recipient, an amount being money or money’s worth, or, in more modern parlance, property. In the simplest situation, if a company formally, bona fide and validly declares a dividend to those constitutionally entitled to it, ordinarily referred to as its shareholders, the common-law character of the payment is, surely, indisputable; it is a dividend. In less formal circumstances, the payment of an amount by a company to some other party will have be identified from amongst a range of possibly applicable transactions, including a dividend, a consideration for value tendered through the supply of goods or independent services, remuneration for services rendered, a donation, an erroneous payment, fraud, or simple theft.

Is the ordinary meaning of dividend at all relevant? The closer you look at the Income Tax Act, the more you wonder. There are instances in which dividend is clearly used other than in its defined sense, and then there are ‘foreign dividends’ (in which dividend is used in its ordinary sense, perhaps as coloured by international law), deemed dividends, which stand in a category of their own, and ‘dividends’ as defined in s 64D.

1.2 ‘Treaty’ dividends Another way of understanding dividend in its ordinary sense is to see how it is defined in the tax treaties concluded by South Africa under s 108 of the Income Tax Act. What follows is a reproduction of



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art 10(3) of the treaty with the Peoples’ Republic of China, a representative provision of its kind.

External 1—treaty with China (art 10(3))

Definition of ‘dividend’

Peoples’ Republic of China art 10(3)

3. The term ‘dividends’ as used in this Article [art 10] means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.

Income from shares is far better than company profits, since it places emphasis on the nature of the accrual to the property-holder, rather than on the nature of the payment made by the company. Even so, although obliquely, the payment by the company is characterized as a distribution. Rather than only shares, the property-holder is envisaged as alternatively holding corporate rights…participating in profits. And dividends are effectively distinguished from interest by reference to the source of interest as being a debt-claim.

1.3 Dividends under the Income Tax Act Dividend is, at the time of writing, used 411 times in the Income Tax Act, predominantly although not exclusively in its defined sense of ‘dividend’. ‘Foreign dividend’ is more exclusively a term of art, and is used 126 times, in every instance undoubtedly in its defined sense. Remarkably in an age of shabby legal drafting, neither definition in s 1(1) refers to the other.

1.4 Definition of ‘dividend’: introduction If you truly want to understand what is a ‘dividend’, think of it as a distribution of an amount by a resident company to its shareholders, as long as, by shareholders, you mean any person holding full or partial or limited rights in its shares.

Section 1(1) sv ‘dividend’

Income Tax Act 1—‘dividend’ (s 1(1))

Definition

ITA s 1(1) sv ‘dividend’

‘[D]ividend’ means any amount, other than a dividend consisting of a distribution of an asset in specie declared and paid as contemplated in section 31(3), transferred



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or applied by a company that is a resident for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or applied—

[ Checked against original text of Act 23 of 2018]

(a) by way of a distribution made by; or (b) as consideration for the acquisition of any share in, that company, but does not include any amount so transferred or applied to the

extent that the amount so transferred or applied— (i) results in a reduction of contributed tax capital of the company; (ii) constitutes shares in the company; or


(iii) constitutes an acquisition by the company of its own securities by way of a general repurchase of securities as contemplated in subparagraph (b) of paragraph 5.67(B) of section 5 of the JSE Limited Listings Requirements, where that acquisition complies with any applicable requirements prescribed by paragraphs 5.68 and 5.72 to 5.81 of section 5 of the JSE Limited Listings Requirements or a general repurchase of securities as contemplated in the listings requirements of any other exchange, licensed under the Financial Markets Act, that are substantially the same as the requirements prescribed by the JSE Limited Listings Requirements, where that acquisition complies with the applicable requirements of that exchange;

[ Checked against the original text of Act 34 of 2019]

Defined terms—see s 1(1) Company, resident, person, share, contributed tax capital.

There was perhaps a time when the infallibly distinctive operative dividend-verb was distribute but today every provision having anything to do with ‘dividends’ and ‘foreign dividends’ is afflicted with a pantheon of dividend-verbs, chosen if not at random then by a worse-than-third-rate legal draftsperson.

1.5 Further reading: development of the definition After years of insane, repeated amendments, the definition of ‘dividend’ in s 1(1) of the Income Tax Act has remained surprisingly stable for what, in the chaotic South African fiscal scene, passes for a considerable period (C Divaris The History of a ‘Dividend’ 2017 edition). In fact, it managed to remain unchanged as from 1 April 2012 until 18 December 2017, and has been amended only once since then. For all the effort it has enjoyed, however, it remains a rotten piece of legal drafting. And the brunt of the misbegotten efforts of the legal draftsperson in this sphere has been borne by the astonishingly complex definition of ‘contributed tax capital’, which has remained unchanged even longer, as from 20 January 2015.

The following items illuminate the disgraceful efforts of the National Treasury, under strong American influence, to devise the current, catastrophic system of taxing dividends.



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From TSH 1—drafting the definition of ‘dividend’

Daft drafting decisions—the dividends tax In The Dividends Tax—A legislative history, I record the avalanche of law and amendments to that law that brought the dividends tax into existence, with effect as from 1 April 2012. To reach its point of inception, the original text of the tax was changed by thirty-seven amendments and fifty-three amendments to amendments.

Then came a slew of amendments backdated to 1 April 2012, totalling thirty-three.

After that it was plain sailing, with a mere

seventeen amendments, changing the law as at 1 September 2012, I October 2012 and 20 December 2012;

fourteen amendments, changing the law as at 1 January 2013 and 1 February 2013;

three amendments, changing the law as at 1 April 2013; twelve amendments, changing the law as at 3 June 2013 and 4 July

2013; four amendments, changing the law as at 12 December 2013 and

16 January 2014; and eight amendments, changing the law as at 20 January 2015 and

1 March 2015.

The longest period that the law has remained unchanged so far is about six months. If you believe that anyone either in the private sector or in SARS kept anywhere near pace with these changes, you must be looking forward with eager anticipation to the arrival of the Easter Bunny. Please do give him my regards.

Nor do I believe that strict compliance was physically possible, since many amendments are promulgated long after their effective dates, and, if you try to anticipate them by relying upon draft bills or even bills proper, you could come a cropper.

The sheer insanity of many of the changes is notable. Take, for example, the seemingly simple intention to change all references to government from

the Government, a provincial administration or a municipality

to

the government of the Republic in the national, provincial or local sphere.

Only fourteen provisions constitute the dividends tax, which runs from s 64D to s 64O of the Income Tax Act. Within that range, the old reference appears only two times, in ss 64EB(2)(a)(ii) and 64F(1)(b).

Section 70(1)(a) of the Taxation Laws Amendment Act 43 of 2014 made the substitution in s 64F(1)(b) (exemption from the tax) without specifying an effective date, leaving the date of promulgation, 20 January 2015, to



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apply. But s 69(1)(a) of the very same amending act made the very same

substitution in s 64EB(2)(a)(ii) (borrowed listed shares), but with a specific effective date of 4 July 2013, providing further that the amendment applies to amounts paid on after that date.

I am often unable to divine the rationale behind particular effective dates but this instance encourages me in the recurring thought that neither can the authorities. Lacking leadership, they have made an incredible mess of our tax laws.

[Source: 143 TSH 2015]

From TSH 2—drafting the definition of ‘dividend’

Daft drafting decisions—‘dividend’ If there is any justification at all for amendments to amendments, which are applied to an amending act, as opposed to conventional amendments, which are applied to a principal act, it would go along the following lines:

Even though our fiscal authorities are obsessed with effective dates and insist on applying the greatest variety possible of effective dates, as a nation, we do not record effective dates in the body of our principal acts. (How dumb is that?) Since these dates appear only in amending acts, the only way of amending those dates is to use an amending act to amend an earlier amending act. (Are you really paying attention?)

Our fiscal authorities like to make a show of introducing future legislation early, by suspending the effective date until the publication (these days) of a notice in the Government Gazette. The exercise is usually entirely futile, however, since the as-yet ineffective provision will be amended within an inch of its life before the show actually hits the road. Again, the only way to run this circus is by way of an amendment to an amendment, since there is nothing in the principal act that might be amended.

Reality creeps in by way of the increasingly long delays between a draft bill and the passage by the National Assembly of a bill, its criminal alteration by a party or parties unknown while it awaits promulgation, and its promulgation in the Gazette.

At the time the original draft bill is created, supposedly future legislation might still lie comfortably in the future. The only way to amend it is by way of an amendment to an amendment. Alas, by the time of promulgation, the future legislation might already have become law. The amendment to an amendment then appears as being not only inappropriate but positively dangerous, since it might easily be missed by users of the legislation.

What very few realize is that an amendment to an amendment is, on its face, unintelligible, even to the most diligent student of the law. It is simply a blob of numerical cross-references to the amending act being amended.



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You have to go first to that original amendment and from there to the provision of the principal act originally amended. You are required to consider three acts simultaneously, or even four when you come across an amendment to an amendment to an amendment. If it sounds simple, I assure you that it is anything but. Sometimes a single instance holds me up. literally for hours, as I try to puzzle out what is going on.

The present tale of woe starts with the substitution of s 64H(3)(b)(ii) of the Income Tax Act (withholding of dividends tax by regulated intermediaries) by s 89(1)(c) of the Taxation Laws Amendment Act 22 of 2012, with an effective date of 1 April 2012.

From about June or July 2012 onwards, commercially published consolidations of the Income Tax Act would have incorporated this conventional amendment, and, save for a few cognoscenti within or close to the inner circle, everyone would accept the new s 64H(3)(b)(ii) as representing the law.

Then s 201(1) of the Taxation Laws Amendment Act 31 of 2013 appeared, on 12 December 2013, substituting s 89(1)(c) of the Taxation Laws Amendment Act 22 of 2012, with an effective date of 1 February 2013—a date both far in the past of a reader of the amendment to an amendment and far in the future of the original, conventional amendment.

Think about it. What was law as from1 April 2012 on 12 December 2013 ceases to be law, and a new law is effective in its stead as from 1 February 2013.

The authorities might perhaps say: ‘Well, you ought to have read the draft bill, the first bill presented to the National Assembly and the revised bill finally passed; then you would have seen this development coming. So wah!’

To which my reply would be as follows:

Sod you. A draft bill and the bill finally presented are usually so discrepant

that only lobbyists, with much to gain from influencing the direction of the law in their and their clients’ favour, can afford the time to study a draft.

Even a bill actually passed is likely to be criminally amended before it reaches the Government Printing Works, so time invested in a bill might be wasted.

Surely you could have foreseen that a 2013 amending act could not possibly have appeared before 1 April 2012 and so should have relied upon a conventional amendment rather than an amendment to an amendment? The nature of the amendment would then have been more apparent to a reader of the 2013 amending act.

Is your current draftsperson so bloody pathetic that he arbitrarily decides whether an amendment is to be of the conventional or amendment-to-an-amendment variety? Does he think it is up to him to choose?

Or do you have some silly internal rule distinguishing between the correction of cockups and ‘genuine’ amendments?

Did I remember to say ‘Sod you’?



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From TSH 3—on the history of the definition of ‘dividend’

The history of a ‘dividend’ (1)—who gets the law right? The emergence of the Taxation Laws Amendment Act 22 of 2012 on 1 February 2013 enabled me fully to update my History of a ‘Dividend’. At the same time, because the commercial publishers have by now updated their consolidations of the tax law (whether on the basis of bills or acts remains to be seen), I was able to compare my rendition against the work of others. Even though I have been consolidating legislation for most of my career, I came out of this exercise shaken. It is so complicated trying to make sense of amendments, amendments to amendments, and amendments to amendments to amendments, not to mention the bewildering array of effective dates, that I doubt whether any one rendition of the tax law in the country is altogether accurate.

To make matters worse, my personal challenge is greater than the norm, since in this publication (as in other, similar publications) one of the objects is to record the law as it stands at particular moments in time.

A month ago, I picked up amendments to amendments in Act 24 of 2011—promulgated on 10 January 2012—but somehow overlooked four substantive amendments, three of which amended the definition of a ‘dividend’ in s 1 (now s 1(1)) of the Income Tax Act as at I January 2011, that is, in the distant past (of promulgation), while the fourth substituted the entire thing as at 1 April 2012, that is, in the immediate future (again, of promulgation).

I had also missed the 1 January 2011 and 1 April 2012 versions of the definition of the term ‘contributed tax capital’. which is fast becoming unintelligible (complexity is gradually being transferred from the one definition to the other, with early, foolhardy attempts at stark simplicity now in ruins).

The first oversight explains a claim I made in 118 TSH 2013—which at the time even I thought was odd—that the current definition of a ‘dividend’ has subsisted since 30 September 2009. What tosh!

On the other hand, a commercial publisher missed an amendment to an amendment to an amendment affecting the effective date of the latest amendment to the definition of the term ‘contributed tax capital’ in s 1(1). It caught the amendment to an amendment but not the amendment to an amendment to amendment. (Are you following?)

To even things out, I had missed an amendment to an amendment to the definition of the term ‘effective date’ in s 64D(1).




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From TSH 4—more on the history of the definition

The history of a ‘dividend’ (2)—was this STC change legal? Where will this drafting chaos end? And what constitutional rights are being trampled in the process?

For example, I am concerned by the very latest wording of s 64C(4)(a), an exemption from the now-defunct STC rendered effective as from 1 January 2011 (!) by s 82(1) of the Taxation Laws Amendment Act 22 of 2012, promulgated on 1 February 2013.

The preceding bill came out on 25 October 2012, and the first draft of the bill came out on 13 March 2012 (there were two drafts). Thus, if the amendment affects taxpayers’ interests, no matter how insanely vigilant they were, they would not have enjoyed any notice whatsoever.

The trouble is that I cannot easily say—and not for the first time—whether the amendment promotes or harms taxpayers’ interests. The exemption used to apply

(a) where the amount constitutes a dividend,

Now it applies

(a) where the amount would have constituted a dividend as defined in section 1 without regard to paragraphs (i), (ii), (iii) and (iv) of that definition;

The paragraphs referred to—elsewhere described as ‘subparagraphs’—represent exclusions from the definition of a ‘dividend’. I am a hopeless mathematician, but might this proposition be correct?

The exclusion used to address the reduced set of the transactions comprising a ‘dividend’, namely (essentially), a transfer to shareholders, but excluding things such as a reduction of contributed share capital.

Now it addresses the full set of such transactions, without reduction. Therefore the exemption is wider than it used to be and so is

favourable to taxpayers’ interests.

But stay! What about those taxpayers not the chums of the National Treasury and so unaware of this (once) upcoming relief (if I have maths right) from the STC? They would have missed the opportunity to make distributions free of the STC or, worse still, might have made such distributions and paid the STC under the law as it stood at the time.

(I have had personal experience, although only by way of hearsay, of the Treasury’s giving chums a heads-up of a forthcoming relief. It is one of the founding precepts of this newsletter that all fiscal information should be available to everyone and at the same time.)

The importance of paragraph-endings One final point. Although I am currently exploring other ways of converting



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GPW PDF files to Word, a very accurate method (not involving error-prone OCR) is to copy and paste.

The disadvantage is that each line copied is rendered as ending with a paragraph mark denoting the end of a paragraph. To get rid of superfluous paragraph marks, I use a find-and-replace technique which aims at leaving behind only those marks genuinely at the end of paragraphs of text. But these will not necessarily be the paragraph marks of the original. For example,

(b) as consideration for the acquisition of any share in that company, but does not include any amount so transferred or applied by the company to the extent that the amount so transferred or applied— (i) results in a reduction of contributed tax capital;

differs dramatically in meaning from

(b) as consideration for the acquisition of any share in that company, but does not include any amount so transferred or applied by the company to the extent that the amount so transferred or applied— (i) results in a reduction of contributed tax capital;

In the first version, item (i) is a paragraph of the definition of the definition of a ‘dividend’ in s 1(1) of the Income Tax Act, fully equivalent to paragraph (b). In the second, it is a subparagraph of paragraph (b). My previous methods of data manipulation resulted in numerous errors of this nature, despite the most careful comparisons of the layouts of original and derived documents. It was the idiot draftsperson’s reference to ‘subparagraphs’ of the definition of a ‘dividend’ that led to my discovery that I had the layout wrong.

In order to limit such transmission errors, the Treasury, I say again, should release legislation in both PDF and Word formats. Better still, it should junk our ancient, colonial style of presenting legislation, which is fatally dependent upon layout—the distance of the text from the margin of the page.



The dividends tax—a legislative history Tax is as much about timing as it is about understanding and applying the law. In the distant past, amendments to the tax laws affecting individuals tended to apply to a forthcoming year of assessment ending on the last day of February, while those affecting companies tended to apply to a financial year commencing upon a particular date, usually a date in or at least partly in the future.

Today’s style of legislative change is perfectly displayed in what you might fondly believe is the ‘new’ dividends tax.



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Coming into operation Thanks to GN 1073 GG 34873 of 20 December 2011, it came into operation on 1 April 2012. Exactly what ‘came into operation’ at that moment?

The tax was inserted in the Income Tax Act by the Revenue Laws Amendment Act 60 of 2008 (promulgated on 8 January 2009).

It was junked and substituted, holus bolus, by the Taxation Laws Amendment Act 17 of 2009 (30 September 2009).

Then thirteen amendments and fifty-three amendments to amendments (the way I count such things) were effected by the Taxation Laws Amendment Act 7 of 2010 (2 November 2010).

Finally, twenty-four amendments were effected by the Taxation Laws Amendment Act 24 of 2011 (10 January 2012).

Ordinarily, you might not have expected so much activity with a tax that has been cogitated over and planned for years, but at least all of these developments were forward-looking.

1 April 2012 Was this, then, the law as at 1 April 2012? Hell no. To find out what that was you had to wade through:

The one amendment effected by the Rates and Monetary Amounts and Amendment of Revenue Laws Act 13 of 2012 (9 October 2012).

The three amendments effected by the Tax Administration Laws Amendment Act 21 of 2012 (20 December 2012).

And the twenty-six amendments effected by the Taxation Laws Amendment Act 22 of 2012 (1 February 2013).

Right on! You had to wait until 1 February 2013 to know what was the law on 1 April 2012! It reminds me of the CGT, which is still being written to this day but featured even more amendments backdated to its inception.

October to December 2012 Next come a batch of amendments with effect as from 1 September 2012, 1 October 2012 and 20 December 2012 (thus, at this point, the tax was changing almost on a monthly basis):

The seven amendments (one still not in force) effected by the Tax Administration Act 28 of 2011 (4 July 2012).

The seven amendments effected by the Tax Administration Laws Amendment Act 21 of 2012 (20 December 2012).

And the three amendments effected by the Taxation Laws Amendment Act 22 of 2012 (1 February 2013).

This is a mixed bag, including forward-looking, simultaneous and backward-looking amendments.

1 January 2013 Then comes 1 January 2013:



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The ten amendments effected by the Taxation Laws Amendment Act 22 of 2012 (1 February 2013).

That’s also backward-looking, although only by a smidgen.

1 April 2013 Finally, you get to travel into the future, namely, 1 April 2013, where you will have to contend with:

The two amendments effected by the Taxation Laws Amendment Act 22 of 2012 (1 February 2013).

Where is this going? Counting the early substitution of the entire tax as a single amendment, there have been, by my count, 150 amendments to a tax that is not yet a year old. And with so many of these amendments being backward-looking, it would be insane to expect anyone to have obeyed or enforced the law.

Nor is there any reason to hope that the flow of amendments will abate. They will keep on coming, for years, with, as usual, a wide variety of effective dates, in the past, in the present, and in the future.

Nor will this body of law become more intelligible. It has been growing steadily more complex, and the drafting is so pathetic (at least two draftspersons are involved, one being based on Mars, while their supervisor has been on the Space Station circling the earth) that the law is hugely difficult to understand. All concerned have no idea whatsoever how laws are meant to be written but simply play out their neurotic bad habits, again and again and again. Any meaning is buried by a thicket of needless cross-references, of the ‘as contemplated in’ variety. So much crass incompetence!

My greatest concern is that ill-disciplined torrents of amendments make it extremely difficult to defend yourself against assessments raised long after the event. Hence my latest compilation of the law: The Dividends Tax—A Legislative History, now available for purchase.

To put everything into date order was a nightmarish undertaking. I could never have completed the task without the help of the LexisNexis consolidated version of the current law, which enabled me to ensure that I had not left any provisions out.



Why the History of a ‘Dividend’? The fourth edition of my History of a ‘Dividend’ shows that some arcane-seeming amendments to amendments (excluding those that appear, copiously, in the Taxation Laws Amendment Act, 2012, only just promulgated) actually manage to clarify what the law has been these past few years. (Too bad if you needed to know sooner!) This horrifically



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complex document starts with the definition in its full, ghastly glory, annotated to show all the amendments made to it since Pa was a cowboy.

Then, thanks to painstaking detective work, it shows what the text looked like at particular dates, including only the amendments relevant to each date. Here a great reshuffling has taken place since the third edition, subject only to a single cock-up involving an entirely unnecessary amendment to an amendment yet to be spotted and rectified by the National Treasury (para (k) of a previous incarnation of the definition of a ‘dividend’ in s 1 of the Income Tax Act).

Since 1999 the definition has undergone fifty-three amendments, including amendments to amendments, most of them since 2008.

As I reckon it, the current definition has subsisted since 30 September 2009. But, if you are involved in a more longstanding matter, some dates to watch are 18 January 2009, 1 January 2009, 22 July 2008, 8 January 2008, 1 October 2007 and 7 February 2007. Why these dates? I suppose that, given enough time and energy, you could find out. I pass.

What stands out is the reckless indifference by which major changes are made, only to be abandoned.

Between the National Treasury, working on our tax laws in general, and SARS, rumoured to be responsible for at least the original Tax Administration Act (one of the silliest pieces of legislation it has been my misfortune to encounter), we are a fiscal laughing stock.


1.6 Definition of ‘foreign dividend’: introduction And, if you truly want to understand what is a ‘foreign dividend’, you need to forget whatever you know about a ‘dividend’, since the two concepts are linked only by their common reliance upon a company and shares in that company.

Section 1(1) sv ‘foreign dividend’

Income Tax Act 2—‘foreign dividend’ (s 1(1))

Definition

ITA s 1(1) sv ‘foreign dividend’

‘[F]oreign dividend’ means any amount that is paid or payable by a foreign company in respect of a share in that foreign company where that amount is treated as a dividend or similar payment by that foreign company for the purposes of the laws relating to—

(a) tax on income on companies of the country in which that foreign company has its place of effective management; or

(b) companies of the country in which that foreign company is incorporated, formed or established, where the country in which that foreign company has its place of effective management does not have any applicable laws relating to tax on income,



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but does not include any amount so paid or payable that— (i) constitutes a redemption of a participatory interest in an arrangement

or scheme contemplated in paragraph (e)(ii) of the definition of ‘company’; or

[Act 24 of 2011]

(ii) …[Deleted.]; [Act 22 of 2012]

(iii) constitutes a share in that foreign company; [Act 22 of 2012]

Defined terms—see s 1(1) Foreign company, share, dividend (not used in defined sense), tax (not used in defined sense), income (not used in defined sense).

The definition includes an obvious usage of dividend other than in its sense as defined in s 1(1). The word must consequently be given its ordinary meaning.

1.7 What is and what is not a ‘dividend’

Primary statement of what is a ‘dividend’ Only ‘resident’ ‘companies’ give rise to ‘dividends’. Such dividends comprise, essentially, distributions and share buybacks by such companies:

ITA s 1(1) sv ‘dividend’, extract, annotated

[THIS IS A DIVIDEND] ‘[D]ividend’ means any amount…transferred or applied by a company that is a

resident for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or applied—


[PROPERTY DISTRIBUTED] (a) by way of a distribution made by; or

[SHARE BUYBACKS] (b) as consideration for the acquisition of any share in, that company…;


The concern is with an amount, which is to say, property, and the transfer of ownership in that property from a resident company to some other person, by way of a distribution or as the purchase price of the acquisition by the company of its own shares from that other person.

Exclusion the first: transfer-pricing, deemed dividends In the typical arse-about-face style of the lazy, incompetent draftsperson, in the midst of this primary statement of what is a dividend



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there is an exclusion, for some unknowable reason isolated from the further exclusions to follow:


[THIS IS NOT A DIVIDEND] ‘[D]ividend’ means any amount, other than a dividend consisting of a distribution of

an asset in specie declared and paid as contemplated in section 31(3)…;

This is a deemed dividend arising under s 31, the provision supposedly aimed at discouraging so-called transfer pricing, impossible to integrate at this stage but immediately useful for establishing the point that deemed dividends constitute yet another entry in the dividend menagerie, of dividends as commonly understood, ‘dividends’ as defined, ‘foreign dividends’ as defined, deemed dividends, and dividends as defined in s 64D.

Exclusions the second to the fourth: miscellaneous A return of contributed tax capital to shareholders, an issue of shares, and a JSE-sanctioned general repurchase of its securities by a listed company are not dividends:


‘[D]ividend’…— [ Checked against original text of Act 23 of 2018]

…

[THIS IS NOT A DIVIDEND] …but does not include any amount so transferred or applied to the extent that the

amount so transferred or applied—

[REDUCTION OF CONTRIBUTED TAX CAPITAL] (i) results in a reduction of contributed tax capital of the company;

[CAPITALIZATION SHARES] (ii) constitutes shares in the company; or


[LISTED SHARE BUYBACKS] (iii) constitutes an acquisition by the company of its own securities by way of a

general repurchase of securities as contemplated in subparagraph (b) of paragraph 5.67(B) of section 5 of the JSE Limited Listings Requirements, where that acquisition complies with any applicable requirements prescribed by paragraphs 5.68 and 5.72 to 5.81 of section 5 of the JSE Limited Listings Requirements or a general repurchase of securities as contemplated in the listings requirements of any other exchange, licensed under the Financial Markets Act, that are substantially the same as the requirements prescribed by the JSE Limited Listings Requirements, where that acquisition complies with the applicable requirements of that exchange;




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1.8 Essence of a ‘dividend’

Principal party—a company In order for a dividend to arise, you need, in the first instance, a resident company:

ITA s 1(1) sv ‘dividend’, extract

‘[D]ividend’ means any amount…transferred or applied by a company that is a resident…;


The definition of a ‘company’ in s 1(1) does necessarily identify what might commonly be accepted as such but extends considerably wider (below). The significant thing about such a company is that it is not a ‘foreign company’, a term comprising all other ‘companies’ in the world, being nonresident.

Section 1(1) sv ‘foreign company’

Income Tax Act 3—‘foreign company’ (s 1(1))

Definition

ITA s 1(1) sv ‘foreign company’

‘[F]oreign company’ means any company which is not a resident; [Act 7 of 2010]

Defined terms—see s 1(1) Company, resident.

The company must have shares A ‘dividend’ is defined in the context of a share:


‘[D]ividend’ means any amount…transferred or applied by a company that is a resident for the benefit or on behalf of any person in respect of any share in that company…;


Given the definition of a ‘share’ in s 1(1), all companies have shares, as long as companies are capable of being owned by a legal entity, the secondary party.



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Section 1(1) sv ‘share’

Income Tax Act 4—‘share’ (s 1(1))

Definition

ITA s 1(1) sv ‘share’

‘[S]hare’ means, in relation to any company, any unit into which the proprietary interest in that company is divided;

[Act 22 of 2012]

Defined terms—see s 1(1) Company.

In this sense, a ‘share’ is simply a percentage interest in or ownership of a company.

External 2—SARS ‘Comprehensive Guide to Dividends Tax’

In respect of any share in that company The term ‘share’ is defined in s 1(1)…. An amount transferred or applied by a company that does not have shares does not constitute a ‘dividend’ as defined in s 1(1).

[Source: SARS ‘Comprehensive Guide to Dividends Tax’ (Issue 3)]

Ownership by secondary party Clearly, such shares must be owned by somebody, but the definition of a ‘dividend’ refuses to contemplate such an intimate possibility. Instead, it regards the shares as being somehow associated with a person capable of benefiting from some happening in respect of the shares or on whose behalf things can happen in respect of the shares:


‘[D]ividend’ means any amount…transferred or applied by a company that is a resident for the benefit or on behalf of any person in respect of any share in that company…;


In other words, there must be some causal connection between the shares and the happening:

The company transfers an amount for the benefit of a person in respect of the shares.

The company transfers an amount on behalf of a person in respect



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of the shares. The company applies an amount for the benefit of a person in

respect of the shares. The company applies an amount on behalf of a person in respect of

the shares.

In order to be so privileged, the person must surely be in possession of rights in the ‘shares’, whether amounting to full or partial or limited ownership. In other words, such rights must be the property of the person. The parties to the transaction thus emerge from the drafting fog: they are (1) a resident company, and (2) a person enjoying a patrimonial (property) right in the company’s shares.

Bring in the definition of a ‘share’,



[Act 22 of 2012]

and you are able to identify the secondary party as a person owning or enjoying rights in a percentage interest in the company. The percentage ownership need not comprise full ownership of that percentage, but could run the full gamut of forms of ownership, from a contingent interest, or spes, to a limited interest, such as a usufruct or quasi-usufruct or a bare dominium, to part-ownership or co-ownership, to ownership in undivided shares, to full ownership. In other words, the person (who itches to be but is deliberately not called a shareholder) is someone with either personal or real rights (patrimonial rights) relating to a percentage ownership in a company.

What is staggering in its sheer stupidity is the lack of any such exquisite patrimonial vagueness in all of the other provisions dealing with dividends and distributions by companies dealt with in this work, many, if not all, of which go so far as simply to refer, in time-tested ways, to ownership in the shares of a company, mostly by looking at the person holding (owning) them. The weakness of the definition of ‘dividend’ springs from the profound ignorance of the legal draftsperson about the common law of property and of law in general.

Not to mention an addiction to a colonial-military style of writing, such as the use of the meaningless expression in respect of, explained away in the following item.


In respect of any share in that company The amount transferred or applied by a company must be transferred or applied ‘in respect of’ a share in that company. It has been held that whether



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‘in respect of’ is restricted to a direct or causal relationship, or something wider depends on the context in which it is used. It was held by Howie P in Stevens v CSARS that there is no material difference between the expressions ‘in respect of’ and ‘by virtue of’ in para (c) of the definition of ‘gross income’ in s 1(1) and that they both connote a causal relationship. The context in which ‘in respect of’ is used in the definition of ‘dividend’ in s 1(1) and in para (c) of the definition of ‘gross income’ in s 1(1) is similar and it is therefore arguable that there must be a causal relationship between the amount transferred or applied and the share.

[Source: SARS ‘Comprehensive Guide to Dividends Tax’ (Issue 3)] [Footnotes suppressed.]

Amount passes to secondary party Next, comes a patrimonial event (creation, augmentation, destruction or transfer of ownership of property), in which an amount passes from the ownership of the company to the ownership of the person. An amount, pace the disgraceful Brummeria case, is money or money’s worth (Lategan), or, in more modern parlance, property:


‘[D]ividend’ means any amount…transferred or applied by a company that is a resident for the benefit or on behalf of any person…, whether that amount is transferred or applied—


(a) by way of a distribution made by; or (b) as consideration for the acquisition of any share in, that company…;


That passing of ownership is achieved by:

A transfer or application for the benefit of the person. Clearly, a straightforward transfer of ownership is envisaged, to the disadvantage of the company and to the advantage of the person.

A transfer or application on behalf of the person. Clearly, agency is contemplated, under which the principal—being the new owner of the amount, that is, the person—instructs the company to transfer ownership to some third party.

Either way, property is changing hands, from the company to the person (being—Good grief!—the shareholder). And it does so for no other reason than that the person enjoys a patrimonial right in the shares. It must be that right, and only that right, that enables the person to be so advantaged. Other transactions between the parties, such as sale, rendering of services, compensation, remuneration, overcharging, damages, donation, theft, fraud, extortion or bribery, can never amount to ‘dividends’, since they spring from a causa other than ownership of



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the shares themselves or of some right in them. For a fuller treatment of the ignorant drafting of the definition and its

proliferation of dividend verbs, see below.

1.9 Difference between dividends and foreign dividends A dividend is triggered by a patrimonial event, in the sense that a right to an amount (property) is created by a company in favour of the person enjoying a patrimonial right in the company’s shares. This is an amount due (dies cedit). The date for payment (dies venit) is irrelevant:


‘[D]ividend’ means any amount…transferred or applied by a company that is a resident for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or applied—


(a) by way of a distribution made by; or (b) as consideration for the acquisition of any share in, that company…;


A foreign dividend, by contrast, involves an amount paid or payable. An amount payable signifies an amount already due (dies cedit) that has become ripe for payment (dies venit). In this context, an amount paid (as opposed to payable) would be one paid before the time for payment:

ITA s 1(1) sv ‘foreign dividend’, extract

‘[F]oreign dividend’ means any amount that is paid or payable by a foreign company in respect of a share in that foreign company where that amount is treated as a dividend or similar payment by that foreign company for the purposes of the laws relating to…;

[Act 24 of 2011]

See also below.


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Chapter 1: Nature of dividends—what is not a ‘dividend’?


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What is not a ‘dividend’?

1.10 Four exclusions from the definition Insanely, exclusions two, three and four from the definition of a ‘dividend’ in s 1(1) of the Income Tax Act are specifically listed as paras (i), (ii) and (iii) of the definition, while the first is established en passant and in medias res of the principal statement of what is a ‘dividend’:

ITA s 1(1) sv ‘dividend’, annotated

‘[D]ividend’ means any amount,

[FIRST EXCLUSION, EN PASSANT—DEEMED DIVIDEND] other than a dividend consisting of a distribution of an asset in specie declared

and paid as contemplated in section 31(3), transferred or applied by a company that is a resident for the benefit or on behalf

of any person in respect of any share in that company, whether that amount is transferred or applied—


(a) by way of a distribution made by; or (b) as consideration for the acquisition of any share in, that company,

[SECOND TO FOURTH EXCLUSIONS, NUMBERED] but does not include any amount so transferred or applied to the extent that the

amount so transferred or applied—

[SECOND EXCLUSION—RETURN OF CONTRIBUTED TAX CAPITAL] (i) results in a reduction of contributed tax capital of the company;

[THIRD EXCLUSION—CAPITALIZATION SHARES] (ii) constitutes shares in the company; or


[FOURTH EXCLUSION—LISTED SHARE BUYBACK] (iii) constitutes an acquisition by the company of its own securities by way of a

general repurchase of securities as contemplated in subparagraph (b) of paragraph 5.67(B) of section 5 of the JSE Limited Listings Requirements, where that acquisition complies with any applicable requirements prescribed by paragraphs 5.68 and 5.72 to 5.81 of section 5 of the JSE Limited Listings Requirements or a general repurchase of securities as contemplated in the listings requirements of any other exchange, licensed under the Financial Markets Act, that are substantially the same as the requirements prescribed by the JSE Limited Listings Requirements, where that acquisition complies with the applicable requirements of that exchange;


The clown who penned the amendment introducing what is now the first exemption belonged as an honorary member of the same circus as those



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responsible for the definition itself, yet all were solemnly remunerated and pensioned for services rendered by others who have thus far escaped imprisonment for fraud.

1.11 The transfer-pricing, deemed-dividend exclusion (1) Before you are told what is a ‘dividend’ you are told what it is not:

ITA s 1(1) sv ‘dividend’, preamble

‘[D]ividend’ means any amount,

[FIRST EXCLUSION, EN PASSANT—DEEMED DIVIDEND] other than a dividend consisting of a distribution of an asset in specie declared

and paid as contemplated in section 31(3), transferred or applied by a company that is a resident for the benefit or on behalf

of any person in respect of any share in that company, whether that amount is transferred or applied—


Thus excluded is a dividend (ordinary sense) or a ‘dividend’ (defined sense) or a dividend (deemed dividend)—it is as yet unclear—declared and paid (actually, deemed to be declared and paid)—fresh debris in the maelstrom of dividend verbs—in circumstances rendering s 31(3) applicable.

The boondoggle that is transfer-pricing Section 31 is supposedly aimed at the defeat of transfer-pricing but is really intended to generate generous and low-risk fee income for professional firms ready to pretend to offer a service in this field other than a paper trail sufficient to bamboozle SARS and its misguided international counterparts.

The transfer-pricing deemed dividend–s 31(3) Section 31(3) is the provision of particular interest in the present context. It targets a difference between the books and supposed reality.

Section 31(3)

Income Tax Act 5—consequences of transfer pricing (s 31(3))

Consequences of transfer pricing

ITA s 31(3)

(3) To the extent that there is a difference between— (a) any amount that is, after taking [s 31(2)] into account, applied in the

calculation of the taxable income of any resident that is a party to an affected transaction; and

(b) any amount that would, but for [s 31(2)], have been applied in the calculation of the taxable income of the resident contemplated in [s 31(3)(a)],



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[Act 24 of 2011]

the amount of that difference must, if that person is a resident and the other person to the affected transaction is a person as contemplated in paragraph (a)(i)(bb) or (a)(iii)(bb) of the definition of ‘affected transaction’—

(i) if that resident is a company, be deemed to be a dividend consisting of a distribution of an asset in specie declared and paid by that resident to that other person; or

[Act 43 of 2014]

(ii) if that resident is a person other than a company, be deemed, for purposes of Part V [of Chapter II; Donations tax], to be a donation made by that resident to that other person,

[Act 25 of 2015]

on the last day of the period of six months following the end of the year of assessment in respect of which that adjustment is made: Provided that where the amount of that difference was prior to 1 January 2015 deemed to be a loan that constitutes an affected transaction, so much of that loan as has not been repaid before 1 January 2015 must—

[Act 43 of 2014]

(a) if that resident is a company, be deemed to be a dividend consisting of a distribution of an asset in specie that was declared and paid by that resident to that other person; or

(b) if that resident is a person other than a company, be deemed, for purposes of Part V [of Chapter II; Donations tax], to be a donation made by that resident to that other person,

on 1 January 2015. [Act 24 of 2011]

Defined terms—see s 1(1) Taxable income, resident, person, company, dividend, year of assessment.

The targeted difference, between supposed reality and what the books show, is, if the resident victim-taxpayer is a company, deemed to be a dividend consisting of a distribution of an asset in specie deemed to be declared and paid by that resident company to the other person concerned. (Otherwise, it is a donation.)

It is not a ‘dividend’ but it is a dividend, got it? In such circumstances the targeted difference is excluded from the definition of a ‘dividend’ but is deemed to be

a dividend consisting of a distribution of an asset in specie

that is, a dividend in kind,

declared and paid

by the resident company to the other person. The wording is clearly intended to engage the dividends tax, even though ‘dividends’ as defined already include dividends in kind, which are already caught



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within the net of the dividends tax. What on earth is going on? The following item claims that the purpose was to exclude a s 31(3)

transfer-pricing deemed dividends from the definition of ‘dividend’ but subject it to the dividends tax on a dividend in kind, since transfer-pricing deemed dividends need not relate to a ‘share’ (and so would be excluded from the definition of ‘dividend’) and might already be included in the definition of ‘dividend’ (and so presumably require to be excluded from any possible double counting).

External 4—explanatory memorandum: s 31(3) dividends

Purpose of exclusion of s 31(3) transfer-pricing deemed dividends

I. Background

A Definition of dividend in section 1 of the Act The definition of dividend in section 1 of the Act means any amount transferred or applied by a company that is a resident of South Africa for the benefit of or on behalf of any person in respect of any share in that company. An amount transferred or applied includes a distribution made by that company or consideration for the acquisition of any share in that company. The definition contains three exclusions, namely, amounts resulting in a reduction of contributed tax capital of the company, where the company transfers shares in that company and a general repurchase as describes in the definition by a listed company of its own shares on the JSE.

B. Amount deemed as dividend in section 31 of the Act In 2015, amendments were made to section 31 of the Act to make provision for a transfer pricing secondary adjustment. The adjustment is deemed to be a dividend consisting of a distribution of an asset in specie (dividend in specie) declared and paid by the resident company to the non-resident connected person. The deemed dividend in specie is currently subject to dividends tax at a rate of 20 per cent subject to the provisions of the relevant tax treaty.

II. Reason for change Section 64D of the Act contains a definition of ‘dividend’ for purposes of Dividends Tax. This definition refers to certain dividends and foreign dividends as defined in section 1 of the Act.

In the context of the reference to: ‘in respect of any share in that company’ in the definition of dividend a ‘share’ is defined in the Act as any unit into which the proprietary interest in a company is divided. In general, the meaning of a ‘share’ describes a share in a company as a bundle or conglomerate of personal rights that entitles the holder thereof to an interest in the company, its assets and dividends. However, in certain instances, the deemed dividend in specie that results from a transfer pricing adjustment in the context of intercompany mispricing does not relate to a ‘share’ as defined.



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However, an amount deemed as a dividend in specie as a result of a transfer pricing secondary adjustment in terms of section 31, in some limited circumstances, already constitute a dividend as defined in section 1 of the Act.

III. Proposal It is proposed that clarity should be provided in the Act that an amount deemed as a dividend in specie as a result of a transfer pricing secondary adjustment in terms of section 31 of the Act is only a dividend for the purposes of dividend tax and must be excluded from the definition of dividend in section 1 of the Act.

An amendment to section 64D of the Act is then required to include an amount deemed as a dividend in specie as a result of a transfer pricing secondary adjustment in terms of section 31 of the Act, as a dividend subject to dividends tax.

IV. Effective date The proposed amendments will come into operation on 1 January 2019 and apply in respect of years of assessment commencing on or after that date.

[Source: Explanatory Memorandum on the Taxation Laws Amendment Bill, 2018]

What is actually excluded Thus what is excluded under this heading from the global definition (applying supposedly to the entire act) of ‘dividend’ is in fact (a) any amount that it might include as well as (b) any amount that it does not include entirely artificially designated as a dividend for dividends tax purposes by s 31(3), which, as a matter of fact, is specifically included in the local definition (applying only for purposes of the dividends tax) of ‘dividend’ in s 64D.

Section 64D sv ‘dividend’

Income Tax Act 6—‘dividend’ (s 64D)

Definition—local

ITA s 64D sv ‘dividend’

‘[D]ividend’ means any dividend or foreign dividend as defined in section 1, including any amount contemplated in section 31(3)(b)(i), that is—


(a) paid by a company that is a resident; or [ Checked against the original text of Act 24 of 2011] [ Checked against the original text of Act 7 of 2010]


(b) paid by a foreign company— [ Checked against the original text of Act 31 of 2013] [ Checked against the original text of Act 24 of 2011]

(i) if the share in respect of which that foreign dividend is paid is a listed share; and



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(ii) to the extent that that foreign dividend does not consist of a distribution of an asset in specie;

[ Checked against the original text of Act 24 of 2011] [ Checked against the original text of Act 7 of 2010]


Defined terms—see s 1(1) Dividend, foreign dividend, company, resident, foreign company, share, listed share.

Drafting error There is no provision ‘section 31(3)(b)(i)’. What is intended is ‘section (3)(i)’.

What is vaguely referred to in the s 1(1), global definition of ‘dividend’ as

a dividend consisting of a distribution of an asset in specie declared and paid as contemplated in section 31(3),

is more closely identified in the s 64D local definition of ‘dividend’, albeit in a garbled form, as

any amount contemplated in section 31(3)(b)(i),

meaning, in both instances,

ITA s 31(3), extract

(3) To the extent that there is a difference between— (a) any amount that is, after taking [s 31(2)] into account, applied in the

calculation of the taxable income of any resident that is a party to an affected transaction; and

(b) any amount that would, but for [s 31(2)], have been applied in the calculation of the taxable income of the resident contemplated in [s 31(3)(a)],

[Act 24 of 2011]

the amount of that difference must, if that person is a resident and the other person to the affected transaction is a person as contemplated in paragraph (a)(i)(bb) or (a)(iii)(bb) of the definition of ‘affected transaction’—

(i) if that resident is a company, be deemed to be a dividend consisting of a distribution of an asset in specie declared and paid by that resident to that other person; or

[Act 43 of 2014]

on the last day of the period of six months following the end of the year of assessment in respect of which that adjustment is made….

[Act 43 of 2014]

In other words, a s 31(3) transfer-pricing deemed dividend, deemed to be a dividend consisting of a distribution of an asset in specie, that is, a



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dividend in kind, and deemed to be declared and paid, is not a s 1(1) ‘dividend’ but is nevertheless subject to the dividends tax.

1.12 The other three exclusions: introduction The exclusions from the s 1(1) definition of ‘dividend’, numbered (i), (ii) and (iii), have the effect, as already noted, that (i) a return of contributed tax capital to shareholders, (ii) an issue of shares, and (iii) a JSE-sanctioned general repurchase of its securities by a listed company are not dividends.

In recognition of the possibility that a single amount distributed might comprise both an amount caught by the definition and an amount so excluded, the definition relies upon the time-tested formulation to the extent that in order to indicate that, in appropriate circumstances, an apportionment is not only authorized but compulsory.

1.13 The return-of-contributed-capital exclusion (2) The hugely complex concept of the ‘contributed tax capital’ of a company is dealt with in detail below. The basic idea is that (if such vulgarly direct language is permissible in this hotbed of circumlocution) a company is free to return to shareholders what they invested in its capital, without lumbering them with a ‘dividend’:





extent that the amount so transferred or applied— (i) results in a reduction of contributed tax capital of the company;


In the circumstances,

a reduction of contributed tax capital of the company

can be nothing other than a return to the shareholders of their original, founding capitalization of the company, even though their identity might have changed over the intervening period.

1.14 The issue-of-capitalization-shares exclusion (3) The treatment of capitalization shares (or cap share, long ago called scrip dividends or bonus shares) has a long fiscal history, but, from at least about 1976, they have not been regarded as constituting a ‘dividend’, a state of affairs preserved in the current rendition of the



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definition:





extent that the amount so transferred or applied— (ii) constitutes shares in the company; or


The trouble is that, once issued, they are indistinguishable from the rest of a company’s share capital. One of the achievements of the concept of ‘contributed tax capital’ is to prevent any downstream shenanigans after the issue of a capitalization share. But only the (nonexistent) vigilance of SARS stands guard against other forms of abuse, arising from optional cap issues or optional scrip dividends, subject to the mitigating factor that, if SARS loses out on the so-called income tax, when shareholders take up the scrip, rather than cash, and then immediately flog the scrip, it gains under the so-called capital gains tax. (See also later in this work.) This possibility is not mentioned in the item that follows.


Transfer by a company of its own shares The definition of ‘dividend’ excludes any amount transferred or applied by a company to the extent that the amount so transferred or applied constitutes shares in that company. For example, the transfer by a company of its own shares as capitalization shares or bonus shares is excluded from the definition of ‘dividend’.

This form of transfer does not result in an outflow of overall value from the company, since all of the underlying assets remain within the company. In CIR v Collins Innes CJ stated the following in relation to the issue of bonus shares by a company:

The company has parted with no assets— no money or money’s-worth—and the shareholders have received none. The profits dealt with remain in the business as they were before…. The total assets of the company have not been changed, and his original share represented the same proportion of the then issue as his increased shares do of the increased issue.’

…. In this part of the Guide the term ‘scrip dividend’ is used to refer to a

cash dividend incorporating an election on the part of a shareholder to receive either capitalization shares or cash, with the default election being



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either shares or cash. If a shareholder elects a cash payment, it will constitute a ‘dividend’ as

defined in s 1(1) in terms of the provisions and principles discussed above. If a shareholder elects capitalization shares, it often happens that the number of shares the shareholder becomes entitled to is not a whole number. For example, if the capitalization share alternative entitles shareholders to 2 shares for every 75 shares held it would mean a shareholder holding 100 shares would be entitled to receive 2,67 shares (100/75 × 2). For various reasons shareholders do not generally hold fractions of shares and receive whole shares equal to the rounded down number of shares (2,67 rounded down to 2 shares) and ultimately a fractional share payment in respect of their fractional share entitlements. Whilst the receipt or accrual of capitalization shares falls within para (ii) of the exclusions…, depending on the facts a fractional share payment may constitute a dividend or it may fall within para (ii) of the exclusions.

In summary, the facts applicable to a particular scrip dividend, the fractional share entitlement and the fractional share payment must be considered in determining whether any of the transactions it involves, for example, the issue of capitalization shares or the payment of an amount to a shareholder by the Company or a regulated intermediary, constitutes a ‘dividend’ as defined in s 1(1).

[Source: SARS ‘Comprehensive Guide to Dividends Tax’ (Issue 3)] [Footnote suppressed.]

1.15 The listed-buybacks (4) It might seem absurd that a share buyback is a dividend unless the company carrying out the buyback is a listed company:





extent that the amount so transferred or applied— [ Checked against original text of Act 24 of 2011]





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The practical reason for this anomaly is that ‘the seller on the open market cannot readily identify the purchaser’ (Explanatory Memorandum on the Taxation Laws Amendment Bill, 2011). In other words, the National Treasury is incapable of devising a decent, egalitarian definition of a ‘dividend’, despite years and years of fruitless effort.

The thinking, presumably, is that, if the dividends tax is not collected on listed buybacks, the resulting disposals of their shares by shareholders will lead to the imposition of either income tax or the capital gains tax, and there will be no loss and possibly some gain to the fiscus.


General repurchase by a listed company of its own shares

A general repurchase by a listed company of its own shares on the open market…is excluded from the definition of ‘dividend’, since the holder who disposes of the shares would not necessarily be aware that the company in which the holder holds the shares is buying back the shares.… In such a case the full consideration received by or accrued to the holder for the disposal of those shares will constitute proceeds for CGT purposes or gross income if the shares were held as trading stock.

[Source: SARS ‘Comprehensive Guide to Dividends Tax’ (Issue 3)]

On this exclusion, see also later in this work.

Chapter 1: Nature of dividends—introduction to the dividend verbs


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Introduction to the dividend verbs

1.16 Definition of a ‘dividend’: ‘distribute’, ‘buy’ A normal person, as opposed to the legal draftsperson, is entitled to say that, before any exceptions, a ‘dividend’ as defined in s 1(1) of the Income Tax Act comprises the distribution by a company of an amount to its shareholders (meaning the owners or part-owners of its shares), in their capacity as such, including the application of such an amount to the repurchase by the company of its shares. In this context, distribute means execute a constitutionally valid corporate action associated with the declaration of dividends having the effect of creating a claim (dies cedit) against the company by its shareholders.

Such a focus of the putative mind was inaccessible to the draftsperson. The primary envisaged disposition of an amount (property) by a dividend verb is to transfer or apply it:

ITA s 1(1) sv ‘dividend’, extract, highlighted

‘[D]ividend’ means any amount, other than a dividend consisting of a distribution of an asset in specie declared and paid as contemplated in section 31(3), transferred or applied by a company that is a resident for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or applied—



extent that the amount so transferred or applied…; [ Checked against original text of Act 24 of 2011]

But, of necessity, to transfer or apply an amount in this sense must be exactly the same thing as to distribute it:

ITA s 1(1) sv ‘dividend’, extract, highlighted




extent that the amount so transferred or applied…; [ Checked against original text of Act 24 of 2011]

Primary patrimonial transaction: distribution It may therefore confidently claimed that a ‘dividend’ arises primarily by way of the distribution by a company of an amount to its



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shareholders. That is a sufficient description of the primary patrimonial transaction involved, as envisaged in para (a) of the definition.

Secondary patrimonial transaction: purchase and sale The secondary patrimonial transaction, as envisaged in para (b) of the definition, is one of purchase and sale, under which the company offers its shareholders a consideration for the acquisition of its own shares that they hold, in a so-called share buyback, recognized internationally, at least in financial and economic terms, as being equivalent to and an alternative to the distribution of a dividend. Thus a sufficient description of the secondary patrimonial transaction involved, as envisaged in para (b) of the definition, is a purchase.

Tertiary patrimonial transaction: transfer-pricing The third transaction, as envisaged in the transfer-pricing exclusion,

other than a dividend consisting of a distribution of an asset in specie declared and paid as contemplated in section 31(3)

involves a deemed actual disposition of an amount by a company to its shareholders, although not necessarily an actual one, and its usage of the terms dividend and distribution are not significant in themselves, being entirely fictional elements of a deeming provision.

1.17 Definition of a ‘dividend’: ‘transfer’, ‘apply’ The definition of ‘dividend’ is inarguably concerned with the passing of ownership in property, with the circumstances of that passing determining whether a particular transaction qualifies as a ‘dividend’. Far more important than the modality of that passing is the relationship between the parties, which any less exalted mind than that behind the actual drafting would have referred to as a ‘company’ and its shareholder, with the understanding that shareholder is to be widely understood as including any owner or part-owner.

As argued here, the verbs distribute and buy would have been sufficient to accomplish the entire purpose of the definition, other than for the idiosyncratic reference to deemed dividends under s 31(3), intended to exclude them from the definition. The inclusion of the further dividend verbs transfer and apply is attributable to both execrable drafting (the verbs are not to be found elsewhere in the act) and to a profound ignorance of domestic law, in particular, the law of agency, displayed by the entirely superfluous distinction made between transfers or application for the benefit of and on behalf of the shareholder, mysteriously figured as any person.

To repeat, largely, what was said above in this context:

A transfer or application for the benefit of the person. Clearly, a



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straightforward transfer of ownership is envisaged, to the disadvantage of the company and to the advantage of the person.

A transfer or application on behalf of the person. Clearly, agency is contemplated, under which the principal—being the new owner of the amount, that is, the person—instructs the company to transfer ownership to some third party.

Either way, property is changing hands, from the company to the person, being the shareholder. And it does so for no other reason than that the person enjoys a patrimonial right in the shares. It must be that right, and only that right, that enables the person to be so advantaged. Other transactions between the parties, such as sale, rendering of services, compensation, remuneration, overcharging, damages, donation, theft, fraud, extortion or bribery, can never amount to ‘dividends’, since they spring from a causa other than ownership of the shares themselves or of some right in them.

‘Transfer’ A transfer suggests a direct passing of ownership from the company to the person. It would surely include an instruction from the person to transfer ownership to some third party.

‘Application’ What might an application be in this context? It has to involve a form of patrimonial enjoyment by the person not involving a direct or indirect transfer of ownership. Perhaps apply is used in the sense of ‘to use for or assign to a specific purpose’ (Dictionary.com; Black’s is of no use on this score; Bloomsbury’s best contribution is ‘to make use of something to achieve a result’). ‘To use for or assign to a specific purpose’ is probably the sense in which applied is used in the Value-Added Tax Act, for example, in its change-of-use provisions (s 18). It suggests a repurposing. But any such repurposing would surely take place under the instructions of the person (shareholder), given to the company, which would act as agent, and no such instructions could be given without ownership of the amount passing in the first instance to the person.

An unimportant mystery In any event, the mystery is hardly important, since the need for an amount to be transferred or applied is merely to identify the company’s counterparty—a person with a patrimonial right in the company’s shares—and to mark the moment when a dividend arises. The truly important events are identified by an unqualified distribution and a qualifying consideration, under which an amount is transferred or applied by way of:



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A distribution made by the company—under which the person acquires ownership of an amount.

A consideration given by the company to repurchase its own shares—under which the person acquires ownership of an amount in exchange for giving up ownership of shares in the company.

Is an unqualified distribution or a qualifying consideration sufficient to constitute a dividend, or must you have a transfer or application and a distribution, or a transfer or application and a qualifying consideration? The question arises only because the draftsperson is, unquestionably, a complete and utter idiot.

Explanation of the definition? The explanation perhaps lies in the fact that a share buyback involves, at least, on a historical or theoretical basis, first, the declaration of a dividend, and then the application of the amount due to the purchase of the shareholder’s shares. On this basis, what the definition of ‘dividend’ means might be explained in the following manner, if the draftsperson’s own terminology must be used:

The transfer of an amount by a resident company to a person holding a patrimonial right in its shares by way of a distribution of a dividend is a ‘dividend’.

The application by a resident company of an amount due under a dividend to a person holding a patrimonial right in its shares to the purchase of those shares is also a ‘dividend’.

Chapter 1: Nature of dividends—what is a ‘company’?


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What is a ‘company’?

1.18 What is a ‘company’? As already suggested, a ‘company’ might not be quite what you expect, thanks to the complex, extensive definition of the term in s 1(1) of the Income Tax Act.

Section 1(1) sv ‘company’

Income Tax Act 7—‘company’ (s 1(1))

Definition

ITA s 1(1) sv ‘company’

‘[C]ompany’ includes— [Act 58 of 1962]

(a) any association, corporation or company (other than a close corporation) incorporated or deemed to be incorporated by or under any law in force or previously in force in the Republic or in any part thereof, or any body corporate formed or established or deemed to be formed or established by or under any such law; or

[Act 121 of 1984]

(b) any association, corporation or company incorporated under the law of any country other than the Republic or any body corporate formed or established under such law; or

[Act 30 of 2000

(c) any co-operative; or [Act 20 of 2006]

(d) any association (not being an association referred to in paragraph (a) or (f)) [of the definition of ‘company’ in s 1(1)] formed in the Republic to serve a specified purpose, beneficial to the public or a section of the public; or

[Act 30 of 2000

(e) any— [Act 74 of 2002

(i) …[Deleted.]; [Act 17 of 2009

(ii) portfolio comprised in any investment scheme carried on outside the Republic that is comparable to a portfolio of a collective investment scheme in participation bonds or a portfolio of a collective investment scheme in securities in pursuance of any arrangement in terms of which members of the public (as defined in section 1 of the Collective Investment Schemes Control Act) are invited or permitted to contribute to and hold participatory interests in that portfolio through shares, units or any other form of participatory interest; or

[Act 31 of 2013

(iii) portfolio of a collective investment scheme in property that qualifies as a REIT as defined in the listing requirements of an exchange approved in consultation with the Minister and published by the Prudential Authority, as defined in section 1 of the Financial Markets Act, in terms of section 11 of that Act [Financial Markets Act]; or




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(f) a close corporation, [Act 7 of 2010

but does not include a foreign partnership; [Act 7 of 2010]

Defined terms—see s 1(1) Close corporation, Republic, co-operative, portfolio of a collective investment scheme in participation bonds, portfolio of a collective investment scheme in securities, Collective Investment Schemes Control Act, share, portfolio of a collective investment scheme in property, REIT, Minister, Financial Markets Act, foreign partnership.

Drafting error Although the definition of a ‘company’ appears to be inclusive rather than exhaustive. the use of includes clearly was not meant to have that effect, given the great detail in which the definition is constructed. It follows that there is no room under the Income Tax Act for the consideration of some ordinary meaning of company. If caught by the definition, an entity is a ‘company’; otherwise it is something else, or nothing at all. In other words, in this instance includes means means. (On includes, see 135 TSH 2014.)

The indubitable companies All the entities listed in the definition of a ‘company’ in s 1(1), barring one, are identified by law and may thus be classified with as much certainty that the drafting, interpretation and understanding of statutes ordinarily allows:

ITA s 1(1) sv ‘company’, extract, annotated


[SOUTH AFRICAN INCORPORATED PERSONS] (a) any association, corporation or company (other than a close corporation)

incorporated or deemed to be incorporated by or under any law in force or previously in force in the Republic or in any part thereof, or any body corporate formed or established or deemed to be formed or established by or under any such law; or

[Act 121 of 1984]

[OTHER INCORPORATED PERSONS] (b) any association, corporation or company incorporated under the law of any

country other than the Republic or any body corporate formed or established under such law; or

[Act 30 of 2000

[SOUTH AFRICAN CO-OPERATIVES: SEE DEFINITION OF ‘CO-OPERATIVE] (c) any co-operative; or

[Act 20 of 2006]



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OFFSHORE COLLECTIVE INVESTMENT SCHEMES (e) any— (ii) portfolio comprised in any investment scheme carried on outside the

Republic that is comparable to a portfolio of a collective investment scheme in participation bonds or a portfolio of a collective investment scheme in securities in pursuance of any arrangement in terms of which members of the public (as defined in section 1 of the Collective Investment Schemes Control Act) are invited or permitted to contribute to and hold participatory interests in that portfolio through shares, units or any other form of participatory interest; or

[Act 31 of 2013

[REITS] (iii) portfolio of a collective investment scheme in property that qualifies as

a REIT as defined in the listing requirements of an exchange approved in consultation with the Minister and published by the Prudential Authority, as defined in section 1 of the Financial Markets Act, in terms of section 11 of that Act [Financial Markets Act]; or


[CLOSE CORPORATIONS] (f) a close corporation,

[Act 7 of 2010

[‘FOREIGN PARTNERSHIPS’ EXCLUDED] but does not include a foreign partnership;

[Act 7 of 2010]

Incorporated and unincorporated bodies of persons The exception arises under para (d) of the definition:

ITA s 1(1) sv ‘company’, para (d)

‘[C]ompany’ includes— (d) any association (not being an association referred to in paragraph (a) or (f))

[of the definition of ‘company’ in s 1(1)] formed in the Republic to serve a specified purpose, beneficial to the public or a section of the public; or

[Act 30 of 2000

Associations have members (as opposed to shareholders):

When you are able to sue the members, for example, of a lobby group, the association enjoys no legal status separate from that of its members. It is known as an unincorporated body of persons. It is merely a collection of natural persons bound by contract and pursuing a common purpose, an example being a trade-promotion body, a cartel or a lobby group. (While you also sue the individual members of a partnership, a partnership is probably not to be seen as an unincorporated body of persons; 149 TSH 2015.)

When you are able to sue the association, rather than its members, for example, a club, you are dealing with an incorporated body of



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persons, or universitas, which is a separate legal entity under the common law, that is to say, separate from its members. Logically, and on the strength of its reference to any association, and not to any members of an association, para (d) of the definition of a ‘company’ includes within the ranks of ‘companies’ any universitas.

Thus, when you encounter a universitas, you live with the possibility that its distributions to its members will be ‘dividends’, except that the definition of ‘dividend’ requires a ‘company’ capable of distributing such a thing to have ‘shares’ (above):



[Act 22 of 2012]

The issue then depends upon whether the members of a universitas enjoy a patrimonial interest in it; presumably, a rare event.

In the type of trust known as a bewind the beneficiaries own the trust property, subject to the element of control exercised by the trustees, under an agreement, often one that is, essentially, voluntary. If, as is astonishingly usual, the bewind is involved in some trade or business or public or charitable enterprise, the question may arise whether it constitutes a ‘company’ under para (d) of the definition, on the basis that it was formed in the Republic to serve a specified purpose, beneficial to the public or a section of the public. Since the beneficiaries do enjoy a patrimonial interest in the trust property, in fact, by way of real rights, trust distributions would then qualify as ‘dividends’. (A bewind might conceivably also constitute a partnership.)

1.19 Further reading: what is a ‘company’? The distinction between incorporated and unincorporated bodies of persons is dealt with in the items that follow.

From TSH 7—associations, universitas, bodies of persons

Words & phrases: ‘associations’, ‘universitas’, ‘body of persons’ On the slimmest of evidence, I believe it to be dangerous to explore the case law on this issue earlier than Ex-TRTC United Workers Front and Others v Premier, Eastern Cape Province 2010 (2) SA 114 (ECB), on account of the adverse criticism levied by Van Zyl J against earlier decisions conflating an unincorporated association with a universitas or insisting that a universitas have a constitution.

On the substantive issue of the difference between an association and a universitas, here is what he had to say (footnotes removed):



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Turning to associations, they are described in The Shorter Oxford English Dictionary as ‘A body of people organized for a common purpose; a society’. Claasen provides the following description: ‘An organized body of persons who have joined together under some contract, statute, regulations or Rules, for the purpose of carrying out some common object.’ A distinction must be drawn between, on the one hand, corporate associations which are by virtue of legislation (statutory associations) or under the common law (universitas personarum) legal entities distinct from their members, and what are referred to as unincorporated associations, on the other. For present purposes it is only necessary to deal with a universitas and an unincorporated association. The distinction between these two entities has been explained as follows in Webb & Co Ltd v Northern Rifles; Hobson & Sons v Northern Rifles:

An universitas personarum in Roman-Dutch law is a legal fiction, an aggregation of individuals forming a persona or entity, having the capacity of acquiring rights and incurring obligations to a great extent as a human being. An universitas is distinguished from a mere association of individuals by the fact that it is an entity distinct from the individuals forming it, that its capacity to acquire rights or incur obligations is distinct from that of its members, which are acquired or incurred for the body as a whole, and not for the individual members.

A universitas is therefore a separate legal entity that has perpetual succession with rights and duties independent from the rights and duties of its members. One of the most important rights of a universitas is the capacity to own property. Being a legal persona, a universitas may sue or be sued in its own name. It derives these characteristics from the common law and it is not necessary for it to be created by or registered in terms of a statute.

By contrast, an unincorporated association refers to an association ‘which does not have a legal persona separate from its constituent members’. ‘Corporate’ has a correspondingly opposite meaning. An unincorporated association is regarded as merely an aggregation or collection (a body) of natural persons. Accordingly, if the term ‘unincorporated association’ is used, it refers to nothing more than a collection of individuals who…are bound to one another by contract and who act jointly in pursuit of a common purpose. It has no existence on its own. It consequently cannot own property and has no locus standi to sue or be sued in its own name. In legal proceedings by or against the association, every member must as a result be cited as a plaintiff or a defendant, as the case may be.

Accordingly, the feature that a partnership, a firm and an unincorporated association have in common is that they have no legal personality of their own and do not exist apart from the individuals of whom they are composed.

…. A more correct statement of the law is that it may be advisable, but not

essential, [for a universitas] to have a constitution. This conforms with the manner in which all associations are formed. As the law pertaining to associations is based on a combination of Roman-Dutch law and English law, the prevailing view is that an association is formed on the basis of contract.

[I]t will come into being if the individuals who propose forming it have the



—106—

serious intention to associate and are in agreement on the essential characteristics and objectives of the universitas or unincorporated association. The latter aspect is usually manifested by the approval and adoption of a constitution.

The primary source for determining the characteristics of the association is therefore its constitution. It provides evidence of the intention of the members who contracted to form the association. What the intention of the founding members was is a factual question and, where the constitution is equivocal, or there is no written constitution, it may be determined with reference to other considerations, such as the nature of the association, its object and its activities. For example, in Commissioner for Inland Revenue v Witwatersrand Association of Racing Clubs, the appeal court found that, despite the absence of a written constitution or rules, the respondent association complied with the requisites for a universitas. In arriving at this conclusion Ogilvie Thompson JA had regard to the fact that it acted as a separate entity. This was evidenced by the fact that it had a secretary, kept its funds in a separate banking account, it existed continuously for more than 30 years, the purpose for which it was formed, and the fact that it constantly pursued such purpose….

What then is a body of persons, for example, in fiscal legislation? No different, I say, from an association, and can prove it either by searching through the case reports for the string “body of persons” or, more simply, citing [s 2] of the Interpretation Act sv ‘person’:

‘[P]erson’ includes— (a) any divisional council, municipal council, village management board, or like

authority; (b) any company incorporated or registered as such under any law; (c) any body of persons corporate or unincorporate;

Hold on. Corporate or unincorporate? How does that gel with Van Zyl J’s decision? Black’s agrees that an unincorporated association is not a legal entity. In what sense would it be a ‘person’?


From TSH 8—unincorporated associations & bodies of persons

Words & phrases: unincorporated associations & bodies of persons In 104 TSH 2011 I ended a similarly titled item by claiming that, on the basis of strong evidence, there is no difference between an association and a body of persons. These labels are used interchangeably, both in judgments and statutes.

A far more significant distinction is that between an incorporated association or body of persons, more formally known as a universitas, and an unincorporated association or body of persons. While a universitas is a separate legal entity under the common law, an unincorporated association or body is merely a collection of natural persons bound by contract and pursuing a common purpose.



—107—

As I showed in that issue, the distinction is rather brilliantly demonstrated by Van Zyl J in Ex-TRTC United Workers Front and Others v Premier, Eastern Cape Province 2010 (2) SA 114 (ECB). The case involved a particular rule under the Uniform Rules of Court allowing an association to sue or be sued in its own name.

This, said Van Zyl J, did not automatically confer locus standi upon an entity otherwise lacking it. In order to enjoy independent legal status, an association would have to be a universitas.

Why, then, have the rule? Purely for procedural convenience. You can cite the association by name, without the hassle of determining its precise nature—corporate or unincorporate—and, if unincorporate, without naming each of its members individually.

And that line of reasoning, I imagine, also explains why the Interpretation Act includes as a ‘person’

any body of persons corporate or unincorporate.

The idea, I imagine, is to make it convenient, should it be considered necessary, for a lawmaker to apostrophize an association or body of persons simply as a ‘person’, without having to define or ascertain its exact status and without risk that the actual legal entities involved, whether a universitas or individual natural persons, might escape being encompassed by a particular law.


From TSH 9—universitas

Words & phrases: universitas I hate it when people refer me to textbooks, like the colleague who recently alleged that a universitas is not incorporated, since you can only be incorporated in terms of legislation. That was in response to what I had written in 104, 105 TSH 2011, based entirely upon case reports.

To repeat, this is what Van Zyl J said in Ex-TRTC United Workers Front and Others v Premier, Eastern Cape Province 2010 (2) SA 114 (ECB) (footnotes suppressed):

…. A distinction must be drawn between, on the one hand, corporate associations which are by virtue of legislation (statutory associations) or under the common law (universitas personarum) legal entities distinct from their members, and what are referred to as unincorporated associations, on the other. For present purposes it is only necessary to deal with a universitas and an unincorporated association. The distinction between these two entities has been explained as follows in Webb & Co Ltd v Northern Rifles; Hobson & Sons v Northern Rifles:

An universitas personarum in Roman-Dutch law is a legal fiction, an aggregation of individuals forming a persona or entity, having the capacity of acquiring rights and incurring obligations to a great extent as a human being.



—108—

An universitas is distinguished from a mere association of individuals by the fact that it is an entity distinct from the individuals forming it, that its capacity to acquire rights or incur obligations is distinct from that of its members, which are acquired or incurred for the body as a whole, and not for the individual members. One of the most important rights of a universitas is the capacity to own property. Being a legal persona, a universitas may sue or be sued in its own name. It derives these characteristics from the common law and it is not necessary for it to be created by or registered in terms of a statute.

A universitas is therefore a separate legal entity that has perpetual succession with rights and duties independent from the rights and duties of its members.…

In Ahmadiyya Anjuman Ishaati-Islam Lahore (South Africa) and Another v Muslim Judicial Council (Cape) and Others 1983 (4) SA 855 (C) the following was said:

First plaintiff is a voluntary association. A voluntary association can either be an incorporated voluntary association or an unincorporated voluntary association, ie it can either be a corporate body (universitas) or a non-corporate body. The characteristics of a corporation or universitas are that it should have perpetual succession and be capable of owning property apart from its members….

And in CIR v Witwatersrand Association of Racing Clubs 1960 (3) SA 291 (A) Ogilvie Thompson JA, as he then was said:

…. The first question for decision, therefore, is whether respondent is a ‘person’ within the meaning of this section. Sec 3 of the Interpretation Act, 5 of 1910, provides that, unless the context otherwise requires or unless the statute provides otherwise, the word ‘person’, when used in a statute, includes, inter alia

(b) any company incorporated or registered under any law; or (c) any body of persons corporate or unincorporate.

In the Dutch version (c) above is rendered as ‘een lichaam van personen, hetzij ingelijfd of niet’. In an enquiry as to what is comprehended by the expression ‘any body of persons unincorporate’ it is, I think, noteworthy that the Interpretation Act, 33 of 1957, which repealed Act 5 of 1910, while retaining the identical English words of (c) above, renders them in the Afrikaans text as follows:

Enige liggaam van persone, hetsy met regspersoonlikheid beklee al dan nie.

Although the English text of Act 33 of 1957 is the signed version, it is, in my view, permissible to refer to the Afrikaans text in order to elucidate the somewhat ambiguous English words ‘body of persons unincorporate’…. Thus elucidated, it becomes clear, I think, that the expression ‘body of persons unincorporate’ as used in the Interpretation Act 33 of 1957 means a body of persons which does not have a legal persona separate from its constituent members.



—109—

Thus a universitas is referred to as a corporate body—the opposite of an unincorporated body—or, if you like, an incorporated body. QED.


From TSH 10—‘association of persons’

Words & phrases: ‘association of persons’ Per Nestadt AJA (as he then was) in Shillings CC v Cronje and Others 1988 (2) SA 402 (A):

The use of ‘persons’ in conjunction with ‘association’ is probably superfluous. ‘Unincorporate’ refers to an association ‘which does not have a legal persona separate from its constituent members’ (per Ogilvie Thompson JA in CIR v Witwatersrand Association of Racing Clubs…. ‘Corporate’ would have a correspondingly opposite meaning. The central enquiry is the meaning of ‘association’ (‘vereniging’). It is defined in substantially the same terms by a number of dictionaries to which we were referred. I confine myself to the following. According to Black's Law Dictionary 5th ed:

It is a term of vague meaning used to indicate a collection or organization of persons who have joined together for a certain or common object.... An unincorporated society; a body of persons united and acting together without a charter, but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise.

The Afrikaanse Woordeboek of Terblanche and Odendaal gives the meaning of ‘vereniging’ (and it was the Afrikaans version of the [Group Areas] Act that was signed) as:

saambinding, saamvoeging; vrywillige organisasie van ’n aantal persone met ’n bestuur aan die hoof en statute en gerig op ’n doel wat nie met die openbare orde in stryd mag wees nie; die saamkom en saamwerk van persone tot ’n bepaalde doel, samekoms, geselskap, genootskap, maatskappy, klub.

(See, too, Nibo (Edms) Bpk v Voorsitter van die Drankraad en Andere 1984 (2) SA 209 (NC) at 213E–in fin….)

Some brief amplification of the criterion that ‘association’ takes the form of an (organized) body of persons and its equation to a society is desirable. The appropriate Oxford English Dictionary definition of ‘body’ is ‘a number of persons taken collectively; an aggregate of individuals’. In Group Areas Development Board v Hurley NO…Steyn CJ, in rejecting an argument that certain persons were ‘an association’ within the meaning of ‘company’ in the Group Areas Act (or a body of persons as defined in the Interpretation Act), said at 131A:



—110—

These Indians are, however, on the information before us, no more than a number of individuals having a common religious belief. There is nothing to indicate that they are, as Roman Catholic Indians, in any way congregated, organized or associated as a distinct body or association of persons, and they cannot, in my view, pass as either a person or a company in terms of the above mentioned definitions.

Black (op cit ) describes a ‘society’ as being:

An association or company of persons (generally unincorporated) united together by mutual consent, in order to deliberate, determine and act jointly for some common purpose.

In practice their union and consent usually take place by the approval and adoption of a constitution (Law of South Africa vol 1 sv ‘Associations’ para 498 at 287), providing for membership of the association, office bearers and/or a committee and a name of the association.

In most cases there will be little difficulty in identifying a body of persons as an association within the meaning of the definitions referred to. The prime example of a corporate one (under the common law) is the universitas and (by statute) those registered as companies under s 21 of the Companies Act. Illustrative of an unincorporate one is the well-known voluntary association in all its diverse forms.…


Chapter 1: Nature of dividends—when is a company ‘resident’?


—111—

When is a company ‘resident’?

1.20 When is a company ‘resident’? The definition of ‘resident’ in s 1(1) of the Income Tax Act deals in great detail with the residence of natural persons but is much more concise in its treatment of the residence of artificial persons, including companies.

Section 1(1) sv ‘resident’

Income Tax Act 8—‘resident’ (s 1(1))

Definition

ITA s 1(1) sv ‘resident’, extract

‘[R]esident’ means any— [Act 59 of 2000]

(b) person (other than a natural person) which is incorporated, established or formed in the Republic or which has its place of effective management in the Republic,

[Act 45 of 2003]

but does not include any person who is deemed to be exclusively a resident of another country for purposes of the application of any agreement entered into between the governments of the Republic and that other country for the avoidance of double taxation; [sic]

[Act 12 of 2003]

Provided that where any person that is a resident ceases to be a resident during a year of assessment, that person must be regarded as not being a resident from the day on which that person ceases to be a resident:

[Act 22 of 2012]

Defined terms—see s 1(1) Person, Republic, year of assessment.

In addressing persons that are not natural persons, the definition encompasses ‘companies’—which would include an incorporated association or a body of persons, more formally known as a universitas—and other persons other than natural persons, a set that, thanks to the definition of a ‘person’ in s 1(1), includes insolvent estates, estates of deceased persons, trusts and portfolios of collective investment schemes. Excluded would be a partnership, in which the partners would be the taxable entities, and an unincorporated association or body, which is merely a collection of natural persons bound by contract and pursuing a common purpose, who would be the taxable entities. (See above.)



—112—

Thus the primary test of residence for artificial and incorporated persons,



(b) person (other than a natural person) which is incorporated, established or formed in the Republic or which has its place of effective management in the Republic…;

[Act 45 of 2003]

comprises two alternatives:

Incorporation, establishment or formation in the Republic. A place of effective management in the Republic.

Since these are alternatives, an artificial person caught by one of them will be a ‘resident’, regardless whether the other alternative is inapplicable. For example, a company incorporated here will be a resident, no matter where its place of effective management is located.

In the whole of SALR and SAFLII there are only three case reports to be found in which a place of effective management is referred to:

In Cohen Brothers Furniture (Pty) Ltd. and Another v Minister of Finance and Others (615/95) [1998] ZASCA 15; 1998 (2) SA 1128 (SCA); [1998] 2 All SA 163 (A) (23 March 1998), the place of effective management of a company was a given, and the issue was not examined.

In CSARS v Tradehold Ltd (132/11) [2012] ZASCA 61; [2012] 3 All SA 15 (SCA); 2013 (4) SA 184 (SCA) (8 May 2012), a terrible misunderstanding of the law rendered the outcome a fiasco (110, 111, 117 TSH 2012; see later in this work), but, again, the issue was not examined.

And, in TC 12158 (8 May 2007); ITC 1819 (2007) 69 SATC 159, the issue was yet again irrelevant to the matter. (This case went on appeal as Grundlingh v CSARS (A33/2008) [2009] ZAFSHC 88 (17 September 2009).)

See also The Oceanic Trust Co Ltd NO v CSARS Western Cape High Court case no 22556/09 (13 June 2011).

The SARS Interpretation Note 6 (Issue 2) of 3 November 2015 is entitled ‘Resident—Place of effective management (companies)’. It frankly adopts an OECD-inspired approach to the question (a huge change from the days, since about 1986, at the about the time of the introduction of the regional council levies, when it insisted upon a branch-level approach, unique in all the world).



—113—

External 7—SARS Interpretation Note 6: effective management

Resident—place of effective management (companies) A company’s place of effective management is the place where key management and commercial decisions that are necessary for the conduct of its business as a whole are in substance made. This approach is consistent with the OECD’s commentary on the term ‘place of effective management’.

A company may have more than one place of management but it can only have one place of effective management at any one time. There are normally multiple facts that need to be taken into account, often involving multiple locations, and from those facts and locations it is therefore necessary to determine a single dominant place where effective management is located.

Definitive rules cannot be laid down in determining the place of effective management and all relevant facts and circumstances must be examined on a case-by-case basis.

The place of effective management test is one of substance over form. It therefore requires a determination of those persons in a company who actually ‘call the shots’ and exercise ‘realistic positive management’.

[Source: Interpretation Note 6 (Issue 2) ‘Resident—place of effective management (companies)’ 3 November 2015]

Exclusion of treaty persons Thanks to the so-called treaty exclusion, the provisions of South Africa’s tax treaties governing residence take precedence over domestic law, as long as they lead to an exclusive determination of residence in some other country (also relevant to this issue is s 108(2) (see later in this work), which effectively prioritizes treaty over domestic law):



but does not include any person who is deemed to be exclusively a resident of another country for purposes of the application of any agreement entered into between the governments of the Republic and that other country for the avoidance of double taxation…;

[Act 12 of 2003]

The treaty with China provides an illustrative example of the operation of this exclusion.

External 8—treaty with China (art 4)

Definition

Republic of China, art 4

Article 4



—114—

Resident 1. For the purposes of this Agreement, the term ‘resident of a Contracting State’

means: a) in China, any person who, under the laws of China, is liable to tax therein by

reason of his domicile, residence, place of head office or any other criterion of a similar nature;

b) in South Africa, any individual who is ordinarily resident in South Africa and any other person which has its place of effective management in South Africa;

c) that State and any political subdivision or local authority thereof.

Individual resident of both states 2. Where by reason of the provisions of paragraph 1 an individual is a resident of

both Contracting States, then his status shall be determined as follows: a) he shall be deemed to be a resident only of the State in which he has a

permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);

b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;

c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;

d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

Other residents of both states 3. Where, by reason of the provisions of paragraph 1 [art 4(1)], a person other than

an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management or its head office is situated. However, if such person has a place of effective management in a Contracting State and has a head office in the other Contracting State, the competent authorities of the Contracting States shall by mutual agreement determine the State of which the person in question is a resident.

For the methodology and consequences of a change of residence, see later in this work. See, also, s 9H, which constitutes, in part, an exit tax, also dealt with later in this work.

Chapter 1: Nature of dividends—position of offshore entities


—115—

Position of offshore entities

1.21 Position of offshore entities The definition of ‘company’ in s 1(1) of the Income Tax Act includes three types of offshore entity:

ITA s 1(1) sv ‘company’, extract, annotated


[OTHER INCORPORATED PERSONS] (b) any association, corporation or company incorporated under the law of any

country other than the Republic or any body corporate formed or established under such law; or

[Act 30 of 2000

[OFFSHORE COLLECTIVE INVESTMENT SCHEMES] (e) any—

[Act 74 of 2002


[Act 31 of 2013

[REITS] (iii) portfolio of a collective investment scheme in property that qualifies as

a REIT as defined in the listing requirements of an exchange approved in consultation with the Minister and published by the Prudential Authority, as defined in section 1 of the Financial Markets Act, in terms of section 11 of that Act [Financial Markets Act]; or


[‘FOREIGN PARTNERSHIPS’ EXCLUDED] but does not include a foreign partnership;

[Act 7 of 2010]

All three types of entities are ‘companies’. If they are nonresident, they qualify also as ‘foreign companies’ but are then capable of giving rise only to ‘foreign dividends’.

ITA s 1(1) sv ‘foreign company’

‘[F]oreign company’ means any company which is not a resident; [Act 7 of 2010]


‘[F]oreign dividend’ means any amount that is paid or payable by a foreign company in respect of a share in that foreign company where that amount is

Chapter 1: Nature of dividends—position of offshore entities


—116—

treated as a dividend or similar payment by that foreign company for the purposes of the laws relating to…;

But if they are ‘residents’, by virtue of having their place of effective management in the Republic and being unprotected by a treaty, amounts they distribute and their share buybacks are ‘dividends’:


‘[R]esident’ means any— (b) person (other than a natural person) which is incorporated, established or

formed in the Republic or which has its place of effective management in the Republic,

[Act 45 of 2003]

but does not include any person who is deemed to be exclusively a resident of another country for purposes of the application of any agreement entered into between the governments of the Republic and that other country for the avoidance of double taxation…;

[Act 12 of 2003]

The ability of South Africa to apply its fiscal law in such an unusual situation would be coloured by its jurisdictional reach.

Chapter 1: Nature of dividends—definition of ‘contributed tax capital’


—117—

Definition of ‘contributed tax capital’

1.22 The squeezed-balloon principle of legal drafting After decades of running to about four pages, the then-stable definition of ‘dividend’ fell victim to the National Treasury’s administration, and annual, faux highbrow chaos ensued, to the accompaniment of voracious lobbying efforts by the big professional firms, with the definition of ‘dividend’ in what is now s 1(1) of the Income Tax Act ceaselessly (as one, subsequently famous, minister of finance might have put it) being amended (see C Divaris The History of a ‘Dividend’ 2017 edition). Then the definition shrank to almost a line, only to gain a little bulk in subsequent amendments. But, almost from its inception, the concept of ‘contributed tax capital’ grew ever more wordy and complex, with the result that today it is surely beyond mortal comprehension and integration.

Section 1(1) sv ‘contributed tax capital’

Income Tax Act 9—‘contributed tax capital’ (s 1(1))

Definition

ITA s 1(1) sv ‘contributed tax capital’

‘[C]ontributed tax capital’, in relation to a class of shares in a company, means— [ Checked against the original text of Act 43 of 2014] [ Checked against the original text of Act 24 of 2011]

(a) in relation to a class of shares issued by a company, in the case of a foreign company that becomes a resident on or after 1 January 2011, an amount equal to the sum of—


(i) the market value of all the shares in that company of that class immediately before the date on which that company becomes a resident;


(ii) the consideration received by or accrued to that company for the issue of shares of that class on or after the date on which that company becomes a resident[;] and


(iii) if the shares of that class include or consist of shares that were converted from another class of shares of that company to that class of shares—

(aa) any consideration received by or accrued to that company in respect of that conversion; and

(bb) the amount contemplated in [para (a)(cc)] that was determined in respect of shares of the other class of shares that were so converted,




—118—

reduced by so much of that amount as— [ Checked against the original text of Act 24 of 2011]

(aa) the company has transferred on or after the date on which the company becomes a resident for the benefit of any person holding a share in that company of that class in respect of that share;


(bb) has by the date of the transfer been determined by the directors of the company or by some other person or body of persons with comparable authority to be an amount so transferred; and


(cc) in the case of a convertible class of shares some of the shares of which have been converted to another class of shares, so much of the amount contemplated in this paragraph [para (a) of the definition of ‘contributed tax capital’ in s 1(1)] in respect of that convertible class of shares immediately prior to that conversion as bears to that amount the same ratio as the number of shares so converted bears to the total number of that convertible class of shares prior to that conversion; or


(b) in relation to a class of shares issued by a company, in the case of any other company, an amount equal to the sum of—


(i) the stated capital or share capital and share premium of that company immediately before 1 January 2011 in relation to shares in that company of that class issued by that company before that date, less so much of that stated capital or share capital and share premium as would have constituted a dividend, as defined before that date, had the stated capital or share capital and share premium been distributed by that company immediately before that date; and


(ii) the consideration received by or accrued to that company for the issue of shares of that class on or after 1 January 2011[;] and




(bb) the amount contemplated in [para (b)(cc)] that was determined in respect of shares of the other class of shares that were so converted,



(aa) the company has transferred on or after 1 January 2011 for the benefit of any person holding a share in that company of that class in respect of that share;


(bb) has by the date of the transfer been determined by the directors of the company or by some other person or body of persons with comparable



—119—

authority to be an amount so transferred; and [ Checked against the original text of Act 43 of 2014] [ Checked against the original text of Act 24 of 2011]

(cc) in the case of a convertible class of shares some of the shares of which have been converted to another class of shares, so much of the amount contemplated in this paragraph [para (b) of the definition of ‘contributed tax capital’ in s 1(1)] in respect of that convertible class of shares immediately prior to that conversion as bears to that amount the same ratio as the number of shares so converted bears to the total number of that convertible class of shares prior to that conversion:


Provided that the amount transferred by a company as contemplated in paragraph (a) or (b) [of the definition of ‘contributed tax capital’ in s 1] for the benefit of a person holding shares of any class of shares of that company must not exceed an amount that bears to the total of the amount of contributed tax capital attributable to that class of shares immediately before the transfer the same ratio as the number of shares of that class held by that person bears to the total number of shares of that class;


Defined terms—see s 1(1) Share, company, foreign company, resident, director, dividend.

1.23 ‘Contributed tax capital’: can you possibly be serious? Is the definition of ‘contributed tax capital’ in s 1(1) a definition, a substantive provision, or some combination of the two? Is there a serious expectation that users of the Income Tax Act will internalize its meaning to a degree sufficient to be able to apply it?

Classes of shares One thing that is clear is that contributed tax capital is established in relation to each class of shares in a company:

ITA s 1(1) sv ‘contributed tax capital’, extract

‘[C]ontributed tax capital’, in relation to a class of shares in a company, means…; [ Checked against the original text of Act 43 of 2014] [ Checked against the original text of Act 24 of 2011]

What is a ‘share’?



[Act 22 of 2012]

The reason why it is necessary for contributed tax capital to be established in relation to each class of shares is that, under the definition of ‘dividend’ in s 1(1), a corporate process otherwise leading to a dividend will be excluded if it results in a reduction of contributed tax capital of the company (para (i) of the definition of ‘dividend’):



—120—







That corporate process has already been summarized above in the following statement of what is a dividend:

A normal person, as opposed to the legal draftsperson, is entitled to say that, before any exceptions, a ‘dividend’ as defined in s 1(1) of the Income Tax Act comprises the distribution by a company of an amount to its shareholders (meaning the owners or part-owners of its shares), in their capacity as such, including the application of such an amount to the repurchase by the company of its shares. In this context, distribute means execute a constitutionally valid corporate action associated with the declaration of dividends having the effect of creating a claim (dies cedit) against the company by its shareholders.

Foreign companies and foreign dividends The next certainty is that the concept of ‘contributed tax capital’ is irrelevant to foreign dividends, since there is no exclusion from the definition of ‘foreign dividend’ of contributed tax capital:





but does not include any amount so paid or payable that— (i) constitutes a redemption of a participatory interest in an arrangement

or scheme contemplated in paragraph (e)(ii) of the definition of ‘company’; or

[Act 24 of 2011]

(ii) …[Deleted.];



—121—

[Act 22 of 2012]


Nevertheless, para (a) of the definition of ‘contributed tax capital’ deals with the situation in which a foreign company becomes a resident on or after 1 January 2011:

ITA s 1(1) sv ‘contributed tax capital’, para (a), extract


(a) in relation to a class of shares issued by a company, in the case of a foreign company that becomes a resident on or after 1 January 2011, an amount equal to the sum of…;


Such a rare situation is dealt with below.

Domestic companies Paragraph (b) of the definition of ‘contributed tax capital’ addresses any other company, which, by a process of elimination, must be a ‘company’ that was never a foreign company or was one but became resident before 1 January 2011:

ITA s 1(1) sv ‘contributed tax capital’, para (b), extract


(b) in relation to a class of shares issued by a company, in the case of any other company, an amount equal to the sum of…;


How strange to deal, in this extremely odd manner, with the highly unlikely immigration of a foreign company to the Republic before dealing with pukka domestic companies!

In any event, the computation of the contributed tax capital for each class of the shares of such a domestic company goes like this:

1. Old capital – Capitalized profits +

2. New capital +

3. Conversion consideration +

4. Conversion historically determined amount −

5. New transfers for benefit of person holding shares (subject to determination and conversion adjustment) (subject to cap)



—122—

= Contributed tax capital of company

In what immediately follows, each numbered element of the equation is juxtaposed with its corresponding part of para (b) of the definition of ‘contributed tax capital’.

1. Old capital: capitalized profits (balance remaining)

ITA s 1(1) sv ‘contributed tax capital’, para (b)(i)

(b) in relation to a class of shares issued by a company, in the case of any other company, an amount equal to the sum of—


(i) the stated capital or share capital and share premium of that company immediately before 1 January 2011 in relation to shares in that company of that class issued by that company before that date, less so much of that stated capital or share capital and share premium as would have constituted a dividend, as defined before that date, had the stated capital or share capital and share premium been distributed by that company immediately before that date; and


Stated capital, under the Companies Act, is constituted by shares of no par value. The calculation is required to be made on 31 December 2010, regardless of the company’s year-end. The shares concerned are those issued by that date. It is necessary to consult the definition of ‘dividend’ as at that time. This essentially regarded capitalized profits distributed as being a dividend. What remained was true stated capital, capital or share premium, which, even then, could be returned to shareholders as a non-dividend.

2. New capital (add)

ITA s 1(1) sv ‘contributed tax capital’, para (b)(ii)

(ii) the consideration received by or accrued to that company for the issue of shares of that class on or after 1 January 2011[;] and


The consideration for the new issue might constitute stated capital, capital or share premium. It is added to the contributed tax capital pot.

3. Conversion consideration (add)

ITA s 1(1) sv ‘contributed tax capital’, para (b)(iii)(aa)




—123—



Again, the consideration the conversion might constitute stated capital, capital or share premium. It is added to the contributed tax capital pot.

4. Conversion historically determined amount (add)

ITA s 1(1) sv ‘contributed tax capital’, para (b)(iii)(bb)


(bb) the amount contemplated in [para (b)(cc)] that was determined in respect of shares of the other class of shares that were so converted,


People who write laws in this fashion, relying upon unintelligible numerical cross-references and a parallel, rather than a serial, story line, deserve to be taken out at dawn and shot. Here is how the amount contemplated is described:

ITA s 1(1) sv ‘contributed tax capital’, para (b)(cc)



There are nested amounts contemplated in! The innermost such amount is stated capital, capital or share premium relevant to the converted class of shares. What is relevant is the percentage converted. And it must be transferred, in a bookkeeping exercise, from the converted class to the new class, and so is added to the contributed tax capital pot pertaining to the class under consideration.

Next comes the reduction

ITA s 1(1) sv ‘contributed tax capital’, para (b), extract




—124—

5. New transfers for benefit of person holding shares (deduct)

ITA s 1(1) sv ‘contributed tax capital’, para (b)(aa)

(aa) the company has transferred on or after 1 January 2011 for the benefit of any person holding a share in that company of that class in respect of that share;


These are new reductions of stated capital, capital or share premium. Only transfers are contemplated, not applications (see the definition of ‘dividend’). But, surely, a repurchase of its shares by a company would involve just such a reduction? Can the definition of ‘dividend’ be taken seriously? It has been written by a fool.

ITA s 1(1) sv ‘contributed tax capital’, para (b)(bb)



This is a seemingly substantive provision, embedded within a definition, purporting to give such authoritative persons the power to determine how much of a transfer comprises stated capital, share capital or share premium. Is this a statutory right?

ITA s 1(1) sv ‘contributed tax capital’, para (b)(cc)


Checked against the original text of Act 43 of 2014]

Again, the amount of interest is stated capital, capital or share premium relevant to the converted class of shares. What is relevant is the percentage converted. And it must be transferred, in a bookkeeping exercise, from the converted class to the new class, and so is deducted from the contributed tax capital pot pertaining to the class under consideration.

Subject to a cap

ITA s 1(1) sv ‘contributed tax capital’, proviso

Provided that the amount transferred by a company as contemplated in paragraph (a) or (b) [of the definition of ‘contributed tax capital’ in s 1] for the



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benefit of a person holding shares of any class of shares of that company must not exceed an amount that bears to the total of the amount of contributed tax capital attributable to that class of shares immediately before the transfer the same ratio as the number of shares of that class held by that person bears to the total number of shares of that class;


In other words, you cannot give a particular holder of shares more than a proportional share of a return of stated capital, share capital or share premium.

The official view The subject of classes of share is dealt with in the item that follows.


Class-by-class and pro rate CTC rules CTC is defined in relation to a class of shares issued by a company. A company that has issued several classes of shares must maintain a separate record of CTC on a per-class basis. CTC created by virtue of an ordinary share issue cannot, for example, be allocated or reallocated to preference shares. Similarly, distributions in respect of preference shares cannot be used to reduce the CTC associated with ordinary shares.

When a company makes a distribution out of CTC in respect of a given class of shares, the CTC distributed will be allocated pro rata to the holders of that class of shares. That is, the amount transferred for the benefit of or on behalf of a person beneficially owning the shares must not exceed an amount that bears to the total amount of CTC attributable to that class of shares immediately before the transfer, the same ratio as the number of shares held by that person to the total number of shares in that class.

[Source: SARS ‘Comprehensive Guide to Dividends Tax’ (Issue 3)] [Footnote suppressed.]

Foreign company a resident on or after 1 January 2011 If para (b) of the definition of ‘contributed tax capital’ in s 1(1) may be mastered, para (a) must be a doddle:

ITA s 1(1) sv ‘contributed tax capital’, para (a), annotated


(a) in relation to a class of shares issued by a company, in the case of a foreign company that becomes a resident on or after 1 January 2011, an amount equal to the sum of—


(i) the market value of all the shares in that company of that class immediately before the date on which that company becomes a resident;



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1. Start with the opening market value of the class of shares involved on the day before the company becomes a resident.

(ii) the consideration received by or accrued to that company for the issue

of shares of that class on or after the date on which that company becomes a resident[;] and


2. Add considerations for new issues of that class by the now-resident company.

(iii) if the shares of that class include or consist of shares that were

converted from another class of shares of that company to that class of shares—


(bb) the amount contemplated in [para (a)(cc)] that was determined in respect of shares of the other class of shares that were so converted,


3. Add any post-resident consideration for a conversion, plus the bookkeeping needed to shift the historical stated capital, capital or share premium from the old class to the new.

reduced by so much of that amount as—


(aa) the company has transferred on or after the date on which the company becomes a resident for the benefit of any person holding a share in that company of that class in respect of that share;




4. Deduct post-resident distributions.

(cc) in the case of a convertible class of shares some of the shares of which have been converted to another class of shares, so much of the amount contemplated in this paragraph [para (a) of the definition of ‘contributed tax capital’ in s 1(1)] in respect of that convertible class of shares immediately prior to that conversion as bears to that amount the same ratio as the number of shares so converted bears to the total number of that convertible class of shares prior to that conversion; or




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5. Deduct the necessary bookkeeping adjustment to reduce the carry-value of converted shares.

Provided that the amount transferred by a company as contemplated in

paragraph (a) or (b) [of the definition of ‘contributed tax capital’ in s 1] for the benefit of a person holding shares of any class of shares of that company must not exceed an amount that bears to the total of the amount of contributed tax capital attributable to that class of shares immediately before the transfer the same ratio as the number of shares of that class held by that person bears to the total number of shares of that class;


6. Again, you cannot give a particular holder of shares more than a proportional share of a return of stated capital, share capital or share premium.

1.24 ‘Group company avoidance—s 8G Any functioning mind surviving the definition of ‘contributed tax capital’ is sure to perish upon encountering s 8G, which applies when an ‘issuing company’ issues shares to a nonresident ‘subscribing company’ forming, after the transaction, part of the same ‘group of companies’ as the issuing company.

Section 8G

Income Tax Act 10—shares issued to a group company (s 8G)

Definition—local (‘group of companies’)

ITA s 8G(1)

Determination of contributed tax capital in respect of shares issued to a group company

8G. (1) For the purposes of this section [s 8G] ‘group of companies’ means two or more companies in which one company (hereinafter referred to as the ‘controlling group company’) directly or indirectly holds shares or voting rights in at least one other company (hereinafter referred to as the ‘controlled group company’), to the extent that—

(a) at least 50 per cent of the equity shares or voting rights in each controlled group company are directly held by the controlling group company, one or more other controlled group companies or any combination thereof; and

(b) the controlling group company directly holds at least 50 per cent of the equity shares or voting rights in at least one controlled group company.

Issue of shares to nonresident subscribing company

ITA s 8G(2)

(2) Where a company issues shares (hereinafter referred to as the ‘issuing company’) to any company that is not a resident (hereinafter referred to as the



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‘subscribing company’) that forms, after that transaction, part of the same group of companies as the issuing company, the amount of the contributed tax capital in relation to those shares will, to the extent that the consideration for those shares—

(a) consists of; or (b) is used, directly or indirectly to acquire, any shares in another company that is a resident (hereinafter referred to as the ‘target

company’) and that forms part of a group of companies in relation to the subscribing company, be equal to so much of the total contributed tax capital attributable to shares of that class in that target company so acquired, determined in terms of [s 8G(3)], as bears the same ratio that the number of shares so acquired bears to the total number of shares of that class.

Calculating contributed tax capital

ITA s 8G(3)

(3) The contributed tax capital in relation to the shares in that target company must be determined—

(a) in terms of paragraph (b) of the definition of ‘contributed tax capital’ in section 1; and

(b) with reference to the date from which that target company formed part of a group of companies in relation to the subscribing company.

Exception from ‘contributed tax capital’

ITA s 8G(4)

(4) Paragraph (a) of the definition of ‘contributed tax capital’ in section 1 does not apply in respect of any shares of a class that were issued, as contemplated in [s 8G(2)], by an issuing company before that issuing company became a resident.

[Checked against the original text of Act 17 of 2017]

Defined terms—see s 1(1) Company, share, equity share, group of companies, contributed tax capital, resident.

For the supposed purposes of this improbable effusion, see the item that follows.

External 10—explanatory memorandum: purpose of s 8G

Purpose of s 8G

I. Background The concept of contributed tax capital (CTC) was introduced in the Act in 2011. CTC is a notional tax amount derived from contributions made to a company by holders of a class of shares as consideration for the issue of that class of shares by that company. It is reduced by any capital amount that is subsequently transferred back by the company to one or more shareholders of that class of shares (commonly known as a capital distribution) utilizing that notional tax amount so received.



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A distribution to shareholders which leads to a reduction of CTC does not constitute a dividend and is specifically excluded from the definition of ‘dividend’ in section 1 of the Act and as a result not subject to dividends tax. That said, any transfer by a company to a shareholder, in cash or in kind, which does not constitute a return of CTC will be regarded as a dividend.

In order for a transfer from a company to a shareholder to constitute a reduction of CTC (and accordingly fall outside the dividend definition) the definition of CTC requires that the company directors (or other persons with comparable authority) determine that the transfer constitutes a transfer of CTC. This implies that a specific resolution must be taken in order for a company to return CTC to its shareholders. Without this specific company resolution, no reduction of CTC can occur and the amount transferred would constitute a dividend and be subject to dividends tax at a rate of 20 per cent.

II. Reasons for change Government has identified a structure in terms of which South African subsidiary companies with foreign parent shareholders increase their CTC and thereby avoid payment of dividends tax through capital distributions to its foreign shareholders. This leads to a permanent erosion of the South African tax base as these capital distributions are not subject to CGT in the hands of the foreign parent shareholder if the underlying investment is not in immovable property in South Africa and therefore not within the South African CGT net.

In this structure, CTC is artificially created through the interposition of additional South African subsidiary companies as a means to avoid dividends tax through a capital distribution to foreign parent shareholders within a group of companies.

A South African subsidiary company issues shares to a foreign parent shareholding company that is part of the same group of companies as the South African subsidiary company. As consideration for the shares issued, the foreign parent company provides the South African subsidiary company with shares in another South African company that is also part of the same group of companies.

….

III. Proposal It is proposed that legislation be amended to include:

A. Anti-avoidance measure An anti-avoidance measure that adjusts the value of the consideration received for the issue of the shares by H-Co, to the extent that either a. that consideration consists of; or b. that consideration is used to directly or indirectly acquire; shares in another company that also forms part of the same group of companies as H-Co, to be equal to the value of the CTC in Local S-Co as at the earliest date when Local S-Co formed part of the same group of companies in relation to F-Co.

…. It is proposed that the consideration for the shares received by the issuer

be deemed not to exceed the amount of the CTC available in the issuer for



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that same class of share immediately before the issue of the shares by the issuer.

B. Non-resident subscribing company The anti-avoidance measure will only apply to structures where there is an influencing presence of non-resident subscribing company (F-Co) due to the permanent erosion of the tax base through the exploitation of the CTC concept as detailed above.

C. Resident target company In light of the promotion of South Africa by government as a feasible investment gateway into the rest of Africa, the proposed anti-avoidance measure will be limited to structures where the local S-Co, or so-called target company of H-Co, is a resident company for tax purposes.

D. Pre-existing relationship To ensure that the anti-avoidance measure doesn’t act as a disincentive for investment into South Africa, the anti-avoidance measure will not apply to any structure where there was no pre-existing relationship between F-Co and local S-Co prior to H-Co obtaining shares in that local S-Co.

IV. Effective Date The proposed amendments will be deemed to have come into effect on 19 July 2017 and apply in respect of any share issued on or after that date.

[Source: Explanatory Memorandum on the Taxation Laws Amendment Bill, 2017]

Chapter 1: Nature of dividends—definition of ‘foreign dividend’


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Definition of ‘foreign dividend’

1.25 Dividends v foreign dividends It would be neat to declare that, if a ‘dividend’, as defined in s 1(1) of the Income Tax Act, is a distribution of an amount by a resident company to its shareholders (or a share buyback), a ‘foreign dividend’, as also defined there, is the distribution of an amount by a nonresident company to its shareholders. Unfortunately, not only does the modern tax law abhor the thought of deploying so crass a word as shareholder, preferring instead a thousand circumlocutions or even an embarrassing silence, but it has made a ‘foreign dividend’ accessible only by way of costly fees payable to cross-border tax professionals:





but does not include any amount so paid or payable that— (i) constitutes a redemption of a participatory interest in an arrangement or

scheme contemplated in paragraph (e)(ii) of the definition of ‘company’; or [Act 24 of 2011]



1.26 What is and what is not a foreign dividend Only ‘foreign companies’ distribute foreign dividends:


‘[F]oreign dividend’ means any amount that is paid or payable by a foreign company in respect of a share in that foreign company…;

[Act 24 of 2011]

A redemption of a participatory interest in a portfolio comprised in an investment scheme carried on outside the Republic, and an issue of shares by a foreign company are not foreign dividends:


‘[F]oreign dividend’ means any amount that is paid or payable by a foreign company in respect of a share in that foreign company…

but does not include any amount so paid or payable that—



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(i) constitutes a redemption of a participatory interest in an arrangement or scheme contemplated in paragraph (e)(ii) of the definition of ‘company’; or

[Act 24 of 2011]



The relevant part of the definition of ‘company’ in s 1(1) reads as follows:

ITA s 1(1) sv ‘company’, para (e)(ii)


(e) any— [Act 74 of 2002


[Act 31 of 2013

What is known and what is to be discovered The essential weakness of the definition of ‘foreign dividend’ is that it requires access to or knowledge of foreign tax laws. Once again, an amount is money or money’s worth (property):





[Act 24 of 2011]

1.27 The dividend verbs: definition of a ‘foreign dividend’ As already noted, before any exceptions, a s 1(1) ‘dividend’ comprises the distribution by a company of an amount to its shareholders (meaning the owners or part-owners of its shares), in their capacity as such, including the application of such an amount to the repurchase by the company of its shares. In this context, distribute means execute a constitutionally valid corporate action associated with the declaration of



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dividends having the effect of creating a claim (dies cedit) against the company by its shareholders.

By contrast, a s 1(1) ‘foreign dividend’ comprises an amount paid or payable by a foreign company to its shareholders (meaning the owners or part-owners of its shares), in their capacity as such, in circumstances revealed by some expensive tax professional to be equivalent to a dividend under local law.

An important difference from a ‘dividend’ In this context, payable means that the date for enjoyment by the shareholders of their claims against the foreign company has arrived (dies venit). Paid indicates the date of the actual settlement of their claims (including, where necessary, delivery). If the date of paid follows the date of payable, it is irrelevant, since payable would have established the foreign dividend. If the date of paid precedes the date of payable, a decidedly odd state of affairs would have arisen, since a premature payment of a dividend might fairly be expected to be invalid, unless payable has contractually been reset at an earlier date so as to accelerate settlement. The putative intention, perhaps coloured by a desire to discourage avoidance, is to have paid establish a foreign dividend if it precedes payable.


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Chapter 2: Taxability of interest income—inclusion in gross income


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CHAPTER 2

Taxability of dividend income

Inclusion in gross income

2.1 Difference between income tax and the capital gains tax There are two types of ‘taxable income’ as defined in s 1(1) of the Income Tax Act:

Paragraph (a) taxable income, or computational taxable income. Paragraph (b) taxable income, or inclusional taxable income.

Section 1(1) sv ‘taxable income’

Income Tax Act 11—‘taxable income’ (s 1(1))

Definition

ITA s 1(1) sv ‘taxable income’, annotated

‘[T]axable income’ means the aggregate of—

[COMPUTATIONAL TAXABLE INCOME] (a) the amount remaining after deducting from the income of any person all the

amounts allowed under Part I [Normal tax] of Chapter II [The taxes] to be deducted from or set off against such income; and

[INCLUSIONAL TAXABLE INCOME] (b) all amounts to be included or deemed to be included in the taxable income of

any person in terms of this Act; [Act 5 of 2001]

Defined terms—see s 1(1) Income, person, taxable income, this Act

Computational (para (a)) taxable income is subject to the imposition only of that part of ‘normal tax’ (s 1(1)) colloquially known as the income tax.

Inclusional (para (b)) taxable income is also subject to the imposition of income tax, unless the inclusion concerned springs from s 26A, which includes in para (b) taxable income a taxable capital gain determined under the Eighth Schedule to the act. Such a



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taxable capital gain is subject to that part of the normal tax colloquially known as the capital gains tax, or CGT.

What plugs in the CGT—mediated mostly and certainly not exclusively by the Eighth Schedule to the Income Tax Act—is s 26A.

Section 26A

Income Tax Act 12—inclusion of taxable capital gain (s 26A)

Inclusion of taxable capital gain in taxable income

ITA s 26A

Inclusion of taxable capital gain in taxable income 26A. There shall be included in the taxable income of a person for a year of

assessment the taxable capital gain of that person for that year of assessment, as determined in terms of the Eighth Schedule [CGT].

[Act 5 of 2001]

Defined terms—see s 1(1) Taxable income, person, year of assessment, taxable capital gain.

The reality is that, thanks to rotten drafting, the CGT is smeared all over the Income Tax Act, thanks to CGT-creep (181 TSH 2018).

2.2 Getting to ‘gross income’ If ‘taxable income’ is what remains of ‘income’ after the income tax allowances have been deducted, what is ‘income’, as also defined in s 1(1)?

Section 1(1) sv ‘income’

Income Tax Act 13—‘income’ (s 1(1))

Definition

ITA s 1(1) sv ‘income’

‘[I]ncome’ means the amount remaining of the gross income of any person for any year or period of assessment after deducting therefrom any amounts exempt from normal tax under Part I [Normal tax] of Chapter II [The taxes];

[Act 58 of 1962]

Defined terms—see s 1(1) Gross income, person, year of assessment.



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Drafting error The definition superfluously refers to a period of assessment, meaning a period other than a year, a concept already catered for by the definition of ‘year of assessment’ in s 1(1).

And, if ‘income’ is what remains of ‘gross income’ after all the income tax exemptions have been deducted, what is ‘gross income’?

Section 1(1) sv ‘gross income’, preamble

Income Tax Act 14—‘gross income’, preamble (s 1(1))

Definition

ITA s 1(1) sv ‘gross income’, preamble

‘[G]ross income’, in relation to any year or period of assessment, means— [Act 59 of 2000]

(i) in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such resident; or

[Act 59 of 2000]

(ii) in the case of any person other than a resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such person from a source within the Republic,

[Act 22 of 2012]

during such year or period of assessment, excluding receipts or accruals of a capital nature, but including, without in any way limiting the scope of this definition [of ‘gross income’ in s 1(1)], such amounts (whether of a capital nature or not) so received or accrued as are described hereunder, namely—

[Act 59 of 2000]

Defined terms—see s 1(1) Year of assessment, resident, person, Republic.

Drafting error The preamble to the definition of ‘gross income’, like that of ‘income’, superfluously refers to a period of assessment, meaning a period other than a year, a concept already catered for by the definition of ‘year of assessment’ in s 1(1).

For a resident, gross income comprises all amounts derived during a particular year of assessment, worldwide, other than those of a capital nature. For a nonresident, gross income comprises all amounts derived from a domestic source, other than those of a capital nature.



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2.3 So what, really, is ‘gross income’? An amount as referred to in the definition of ‘gross income’ in s 1(1) is (pace Brummeria) money or money’s worth, or, in more modern parlance, property, widely understood. The basic premiss of the so-called income tax is:

If you derive property, you pay income tax, unless the property is of a capital nature.

By capital, what is intended, broadly, is the tree, from which the fruit, revenue, is derived. Capital in this context has nothing whatsoever to do with the CGT, which comes into consideration solely under para (b) of the definition of ‘taxable income’ (inclusional taxable income), and is utterly unrelated to gross income.

The so-called special inclusions in gross income represented by paras (a) to (n) of the definition—which encompass also the myriad inclusions in ‘income’ mediated by para (n)—extend to items considered under classical tax law to be of a capital nature.

Section 1(1) sv ‘gross income’, para (n), proviso

Income Tax Act 15—‘gross income’, para (n), proviso (s 1(1))

Definition

ITA s 1(1) sv ‘gross income’, preamble, para (n), proviso



[Act 59 of 2000]


[Act 22 of 2012]


[Act 59 of 2000]

[(a) to (m)] (n) any amount which in terms of any other provision of this Act is specifically

required to be included in the taxpayer’s income and that amount must for the purposes of this paragraph [para (n) of the definition of ‘gross income’ in s 1(1)] be deemed to have been received by or to have accrued to the taxpayer:


Provided that where during any year of assessment a person has become entitled to any amount which is payable on a date or dates falling after the last day of such year, that amount shall be deemed to have accrued to the person during such year;



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[Act 31 of 2003]

Defined terms—see s 1(1) Year of assessment, resident, person, this Act, Republic, income, taxpayer.

The para (n) inclusions in ‘gross income’ Thus, via para (n) of the definition of ‘gross income’, amounts specifically required to be included in the taxpayer’s income are included in ‘gross income’ itself. Such amounts are deemed, by para (n)(i), to have been received by or to have accrued to the taxpayer, and so to satisfy the requirements of the preamble to the definition. It is an enduring mystery why inclusions are made in income when they are in any event going to be deemed to be inclusions in ‘gross income’ by para (n) of the definition of ‘gross income’. Why not simply identify them as inclusions in gross income?

(Section 24J(3) is anomalous, inasmuch as it represents a specific, direct inclusion in ‘gross income’ and is thus not reliant upon para (n) of the definition of ‘gross income.)

What all the inclusions aim at and achieve In any event, all such inclusions in gross income, whether direct or, via para (n), indirect comprise, broadly, the fruits of performance, the fruits of investment, and the fruits of recoupments of allowances and special allowances.

The recoupments are a special category, since they seal the system, which rewards privileged expenditures with a deduction but expects any recoveries to be taxed.

All the rest represent forms of return on or reward for labour, services or investment. The collection as a whole positively reeks of revenue. What about the fruits of trade? These are so obviously the fruits of performance that they cannot conceivably form part of capital, and so have no need for especial mention. And, when they spring from the buying and selling of property for the purpose of resale in a profit-making scheme, they are indelibly stamped with the nature of revenue. So much so that it is a waste of time to ask whether any form of property represents an amount of a capital nature. The correct and simpler question is to ask: ‘Is this property trading stock?’ All else is a residual—assuredly to be called capital, as opposed to revenue.

Thus, in broad terms, a gross income amount represents the fruits of endeavours, including investment and dealing in trading stock. If an amount presents lacking this revenue characteristic, it is unlikely to be gross income. And, if it plays the role of revenue, it is just as likely to be gross income. (See 182, 183, 184, 186 TSH 2018.)

2.4 Dividends: a significant inclusion ‘Dividends’ and ‘foreign dividends’ are included in ‘gross income’,



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although not necessarily in ‘income’ or ‘taxable income’.

Section 1(1) sv ‘gross income’, para (k)

Income Tax Act 16—‘gross income’, para (k) (s 1(1))

Definition

ITA s 1(1) sv ‘gross income’, para (k)



[Act 59 of 2000]


[Act 22 of 2012]


[Act 59 of 2000]

(k) any amount received or accrued by way of a dividend or a foreign dividend; [Act 22 of 2012]

Defined terms—see s 1(1) Year of assessment, resident, Republic, dividend, foreign dividend.

If not exempt, subject to income tax The idea, in the first place, is to ensure that, should no exemption apply, dividends and foreign dividends will end up in computational taxable income and thus fall liable to the imposition of the so-called income tax.

Which ‘dividends’? Given the overall structure of the Income Tax Act, it is a safe bet to claim that the para (k) inclusion pertains only to ‘dividends’ and ‘foreign dividends’ as defined in s 1(1). Deemed dividends and ‘dividends’ as defined in s 64D (see both earlier and later in this work) must be taxed in the manner mandated, and anything else perceivable as a dividend but not specifically dealt with must be dealt with under general principles, which require possible inclusion in gross income to be tested first and then possible inclusion in ‘proceeds’ for CGT purposes.

Consequences of inclusion in gross income (1) Secondly, gross income is from time to time used as a metric or threshold for various fiscal purposes. For example, it figures in that



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capacity in s 9I (headquarter companies), s 12E(4) (definition of ‘small business corporation’), s 12J(1) (definition of ‘qualifying company’), s 20A(3)(a) (ring-fencing of assessed loss), s 25BB(1) (definition of ‘qualifying distribution’, in relation to REITs), and para 5(aa) of the Fourth Schedule to the act (labour brokers). The question whether, in each such instance, the draftsperson was aware that gross income is, in the context, irrelevantly swollen by dividends and foreign dividends is unanswerable. From a theoretical point of view, however, the use of gross income, unadjusted for its dividend content, would appear to be irrational, at least in most contexts.

Consequences of inclusion in gross income (2) Thirdly, and most significantly, what is included in gross income cannot form part of any proceeds arising from the disposal of an asset and so cannot attract the imposition of the so-called capital gains tax, thanks to the obscurely positioned para 35(3)(a) of the Eighth Schedule to the Income Tax Act.

8th Sch para 35(3)(a)

Income Tax Act 17—gross income exclusion (8th Sch para 35(3)(a))

Exclusion of gross income from CGT proceeds

ITA 8th Sch para 35(3)(a)

(3) The proceeds from the disposal, during a year of assessment, of an asset by a person, as contemplated in [para 35(1)] must be reduced by—

[Act 25 of 2015]

(a) any amount of the proceeds that must be or was included in the gross income of that person or that must be or was taken into account when determining the taxable income of that person before the inclusion of any taxable capital gain;

[Act 5 of 2001]

Defined terms—see s 1(1) Person, gross income, taxable income, taxable capital gain.

This is the reason why, regardless of its taxability, whether under the income tax or the dividends tax, a ‘dividend’ or a ‘foreign dividend’ as defined can never give rise to a liability for the CGT.

2.5 More on para (k) of the definition of ‘gross income’ The effect of the para (k) inclusion in ‘gross income’,





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[Act 59 of 2000]


[Act 22 of 2012]


[Act 59 of 2000]


differs according to the residential status of the taxpayer.

Residents Since residents are subject to the normal tax on a worldwide basis, all dividends and foreign dividends they derive will be included in their gross incomes.

Nonresidents Nonresidents will, in principle, include in their gross income only their dividends and foreign dividends derived from a source within the Republic. Overriding the common law on this issue of source are the statutory source rules relating to dividends and foreign dividends, s 9(2)(a) and s 9(4)(a).

Section 9(2)(a)

Income Tax Act 18—domestic source of dividends (s 9(2)(a))

Source of dividends

ITA s 9(2)(a)

(2) An amount is received by or accrues to a person from a source within the Republic if that amount—

[Act 24 of 2011]

(a) constitutes a dividend received by or accrued to that person; [Act 24 of 2011]

Defined terms—see s 1(1) Person, Republic, dividend.



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Section 9(4)(a)

Income Tax Act 19—foreign source of dividends (s 9(4)(a))

Source of dividends

ITA s 9(4)(a)

(4) An amount is received by or accrues to a person from a source outside the Republic if that amount—

(a) constitutes a foreign dividend received by or accrued to that person; [Act 24 of 2011]

Defined terms—see s 1(1) Person, Republic, foreign dividend.

Source of dividends and foreign dividends In other words, all ‘dividends’ have a domestic source, which makes sense, since they emanate from resident companies, while all ‘foreign dividends’ have a foreign source, which also makes sense, since they emanate from ‘foreign companies’, which are nonresidents (see earlier in this work). For residents, the distinction makes no difference, since both dividends and foreign dividends are included in gross income, but, for nonresidents, only dividends are so included. Nonresidents therefore cannot derive a gross income by way of foreign dividends.

2.6 The dividend verbs: definition of a ‘gross income’ What is included in gross income is the amount of a dividend or foreign dividend received by or accrued to a shareholder (meaning the owner or part-owner of a share) in a company:




[Act 59 of 2000]


[Act 22 of 2012]


[Act 59 of 2000]




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In this context, accrued means that the shareholder’s claim against the company has come into existence (dies cedit). Received indicates that the shareholder has enjoyed settlement (or payment) of the claim (including, where necessary, delivery) (dies venit). If the date of received follows the date of accrued, it is irrelevant, since accrued would have established the inclusion in gross income. If the date of received precedes the date of accrued, a decidedly odd state of affairs would have arisen, since payments do not ordinarily precede entitlement, and, in the context of a dividend or a foreign dividend, might fairly be expected to be invalid, unless accrued has contractually been reset at an earlier date so as to accelerate settlement. The formulation received by or accrued to is ancient, and, on the received side, is often construed as referring to a naked receipt, not dependent upon the existence of a preceding claim, such as arises (probably uniquely) under an immediate or common-law donation.

Chapter 2: Taxability of dividend income—inclusion in taxable income (CGT)


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Inclusion in taxable income (CGT)

2.7 Dividends and the CGT Under these rules, read with those set out in earlier in this work, what any normal person would call a shareholder may derive the following types of amount as a result of what that same normal person would call ownership of a share or a right in a share in a resident company:

A dividend. Included in gross income but excluded from proceeds for CGT purposes. Includes a share buyback by an unlisted company.

Capitalization shares. Not a dividend. Consideration for share buyback by a listed company. Not a

dividend. A return of contributed tax capital. Not a dividend.

The only other possible flows would arise from the disposal or loss of the shares, in which event the proceeds would fall into gross income if the shares were held as trading stock, or would otherwise represent ‘proceeds’ as defined in para 1 of the Eighth Schedule to the Income Tax Act for the purposes of the CGT.

2.8 Capitalization shares Capitalization shares are not a ‘dividend’:

ITA s 1(1) sv ‘dividend’, para (ii)




extent that the amount so transferred or applied— (ii) constitutes shares in the company; or


Under general principles, if the underlying shares are held as trading stock, capitalization shares will also constitute trading stock. Similarly, if the underlying shares are held as a capital asset, capitalization shares will ordinarily also constitute a capital asset. But when an optional capitalization issue is involved, as permitted by s 47 of the Companies Act (below), and a shareholder chooses to take the shares rather than the cash, intending immediately to dispose of the share in a profit-making scheme, those shares will bear the indelible mark of trading stock



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(although unseen by SARS). Since capitalization shares have no cost, they would be expected to

be added to trading stock or to capital assets at a nil cost or a nil base cost. In relation to trading stock, that expectation might be disturbed by the hugely controversial s 22(4) (on which, see 65 TSH 2008, 86 TSH 2010, 108 TSH 2012).

Section 22(4)

Income Tax Act 20—trading stock for no consideration (s 22(4))

Trading stock acquired for no consideration

ITA s 22(4)

(4) If any trading stock has been acquired by any person for no consideration or for a consideration which is not measurable in terms of money, other than a government grant in kind, such person shall for the purposes of [s 22(3)], unless [s 22(3)(a)(iA)] applies, be deemed to have acquired such trading stock at a cost equal to the current market price of such trading stock on the date on which it was acquired by such person.


Defined terms—see s 1(1) Trading stock, person.

Famously, this provision is taken to mean that you may treat trading stock acquired for no consideration as opening stock in the year of its acquisition, with the result that you effectively claim a deduction for stock acquired at no cost. It is generally applied when trading stock is acquired by donation, inheritance, dividend distribution or some forms of barter. Unassuming as it might seem, it in fact represents a vital part of the machinery of the income tax system.

Section 22(4) previously specifically allocated a nil cost to capitalization shares, a task taken over, seamlessly, by s 40C, which clearly prevails over s 22(4).

Section 40C

Income Tax Act 21—shares, options for no consideration (s 40C)

Issue of shares or options for no consideration

ITA s 40C, current text

Issue of shares or granting of options or rights for no consideration 40C. Where a company issues a share or grants an option or other right in respect of

the issue of a share to a person for no consideration, the expenditure actually



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incurred by the person to acquire that share, option or right must be deemed to be nil. [Act 25 of 2015]

Defined terms—see s 1(1) Company, share, person.

As it currently reads, s 40C aligns the Income Tax Act more closely with the Companies Act, which governs the issue of capitalization shares in s 47.

External 11—Companies Act (s 47)

Issue of capitalization shares

CA s 47(1)

Capitalization shares 47. (1) Except to the extent that a company’s Memorandum of Incorporation

provides otherwise— (a) the board of that company, by resolution, may approve the issuing of any

authorized shares of the company, as capitalization shares, on a pro rata basis to the shareholders of one or more classes of shares;

(b) shares of one class may be issued as a capitalization share in respect of shares of another class; and

(c) subject to [s 47(2)], when resolving to award a capitalization share, the board may at the same time resolve to permit any shareholder entitled to receive such an award to elect instead to receive a cash payment, at a value determined by the board.

Optional cap shares

CA s 47(2)

(2) The board of a company may not resolve to offer a cash payment in lieu of awarding a capitalization share, as contemplated in [s 47(1)(c)], unless the board—

(a) has considered the solvency and liquidity test, as required by section 46, on the assumption that every such shareholder would elect to receive cash; and

(b) is satisfied that the company would satisfy the solvency and liquidity test immediately upon the completion of the distribution.

[Act 71 of 2008]

The upshot is that capitalization shares, once acquired by a shareholder, constitute either a capital asset with a nil base cost or trading stock with a nil cost. This rule will apply both to resident and nonresident shareholders, although nonresident shareholders will be involved in the CGT system to a limited extent only (below).

Comment: The expressed but unofficial view of SARS, that the issue of a capitalization share represents the proceeds under a barter transaction in



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which the shareholder’s pre-existing claim against the company is given up, is, again, unofficially given as the reason for the need for s 40C. But delivery of a capitalization share constitutes mere performance under an obligation constitutionally created by the company, and is part of a single, indivisible transaction. To put the matter another way, performance by way of delivery represents the maturity of the shareholder’s personal right against the company into a real right in the capitalization share.

2.9 Share buybacks: unlisted company The consideration for a share buyback by an unlisted company will either constitute a dividend in full or partly a dividend and partly a return of contributed tax capital:

ITA s 1(1) sv ‘dividend’, para (i)

ITA s 1(1) sv ‘dividend’






Only the contributed tax capital portion will figure as the proceeds arising upon the disposal of trading stock or a capital asset, depending upon the nature of the shares in the hands of their shareholder.

Again, this rule will apply both to resident and nonresident shareholders, although, again, nonresident shareholders will be involved in the CGT system to a limited extent only.

2.10 Share buybacks: listed company Since the consideration for a share buyback by a listed company cannot constitute a dividend, the full amount will figure as the proceeds arising upon the disposal of trading stock or a capital asset, depending upon the nature of the shares in the hands of their shareholder:

ITA s 1(1) sv ‘dividend’, para (iii)





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extent that the amount so transferred or applied— [ Checked against original text of Act 24 of 2011]



Again, this rule will apply both to resident and nonresident shareholders, although, yet again, nonresident shareholders will be involved in the CGT system to a limited extent only.

2.11 Nonresidents Thanks to para 2 of the Eighth Schedule to the Income Tax Act, a nonresident will not be liable to the CGT on an amount excluded from the definition of ‘dividend’, unless the share constitutes an interest in immovable property under para 2(2).

8th Sch para 2(1)

Income Tax Act 22—application of the CGT (8th Sch para 2(1))

Application

ITA 8th Sch para 2(1)

Application [Act 5 of 2001]

2. (1) Subject to paragraph 97, this Schedule [Eighth Schedule; CGT] applies to the disposal on or after valuation date of—

[Act 32 of 2004]

(a) any asset of a resident; and [Act 5 of 2001]

(b) the following assets of a person who is not a resident, namely— [Act 74 of 2002]

(i) immovable property situated in the Republic held by that person or any interest or right of whatever nature of that person to or in immovable property situated in the Republic including rights to variable or fixed payments as consideration for the working of, or the right to work mineral deposits, sources and other natural resources; or

(ii) any asset effectively connected with a permanent establishment of that person in the Republic.

[Act 25 of 2015]



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Interest in immovable property

ITA 8th Sch para 2(2)

(2) For purposes of [para 2(1)(b)(i)], an interest in immovable property situated in the Republic includes any equity shares held by a person in a company or ownership or the right to ownership of a person in any other entity or a vested interest of a person in any assets of any trust, if—

[Act 31 of 2005]

(a) 80 per cent or more of the market value of those equity shares, ownership or right to ownership or vested interest, as the case may be, at the time of disposal thereof is attributable directly or indirectly to immovable property held; and


(b) in the case of a company or other entity, that person (whether alone or together with any connected person in relation to that person), directly or indirectly, holds at least 20 per cent of the equity shares in that company or ownership or right to ownership of that other entity.

[Act 7 of 2010]

Defined terms—see s 1(1) Resident, person, Republic, permanent establishment, equity share, company, trust, trading stock, connected person.

2.12 Foreign dividends What any normal person would call a resident shareholder may derive the following types of amount as a result of what that same normal person would call ownership of a share or a right in a share in a foreign company:

A foreign dividend. Included in gross income but excluded from proceeds for CGT purposes:





[Act 24 of 2011]

A redemption of a participatory interest in a qualifying foreign portfolio of a collective investment scheme. Not a foreign dividend:

Documents

A Bsp Seminars publication · 2020. 10. 8. · Special dividend provisions ... Extracts from the Income Tax Act are taken from my private representation and adaptation of parts of