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Taxation
Tuesday, April 1, 2008
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The legal principles governing the taxability of profits from the disposal of shares have always been complex. Prior to the introduction of capital gains tax (CGT) in 2001, profits from the sale of shares were subject to income tax if the taxpayer was a share-dealer or disposed of the shares in a scheme of profit making. But if the profits were of a capital nature, they were not taxed at all.
Since the introduction of CGT, the profits from the disposal of shares are subject either to income tax or to CGT.
Gerald Seegers, tax partner at PricewaterhouseCoopers SA, says that as the rate of CGT is lower than income tax, most taxpayers would prefer, where possible, to arrange their affairs so that their profits were subject to CGT rather than to income tax.

The old section 9B

In terms of section 9B of the Income Tax Act, a taxpayer who sold JSE-listed shares he’d held for at least five years could elect to have them included in his CGT calculation. SARS might also be precluded from viewing him as a “share dealer”.
Seegers says that the availability of this election was particularly beneficial to taxpayers who were indisputably share-dealers, and who would therefore normally have been subject to income tax on the profit from the sale of shares.
The downside to such an election was that it bound the taxpayer permanently in relation to all JSE-listed shares that he held for five years or longer. The election offered by section 9B did not apply to shares in non-listed companies or to other types of equity interests.
Moreover, says Seegers, the election was available to a taxpayer only once – namely, on the first occasion that he sold JSE-listed shares he had held for five years or longer. Once made, the election bound the taxpayer for all future tax years in respect of the sale of such shares.
In terms of the Revenue Laws Amendment Act 35 of 2007, promulgated on 8th January 2008, section 9B is henceforth to apply only to shares, which were disposed of before 1st October 2007. In relation to shares disposed of on or after that date, a new section 9C, summarised below, will apply.

The new section 9C

In terms of section 9C, the disposal of shares will be governed by the following rules:
• “qualifying shares” must have been held for a continuous period of at least three years;
• “qualifying shares” means all equities except those in a share block company, shares in a non-resident company (unless it was a listed company) and hybrid equity instruments;
• as an anti-avoidance measure, the new provisions will not apply to qualifying shares where, at the time of disposal, the taxpayer was a “connected person” in relation to the issuing company and certain further defined circumstances were present;
• the new provisions will apply automatically, and no election will be available to the taxpayer;
• any amount received by or accruing to a taxpayer as a result of the disposal of qualifying shares will be deemed to be of a capital nature and will thus be subject to CGT;
• in the tax year when a qualifying share is disposed of by the taxpayer, any expenditure or losses incurred in respect of such share and allowed as a deduction in that tax year or any previous year will be included in the taxpayer’s income.

Copyright © Insurance Times and Investments® Vol:21.3 1st April, 2008
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