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Taxation
Thursday, May 1, 2008
More clarity

Profits from the disposal of shares to which section 9C of the Income Tax Act applies will be subject to capital gains tax, and not income tax. The rate of capital gains tax is favourably lower than that of income tax.

However, some anti-avoidance provisions were necessary to prevent property speculators (who pay the higher income tax on their profits) from getting the benefits of section 9C and paying the lower CGT on their profits.
One way around section 9C would have been to buy property and place this in a company or close corporation whose shares they had already held for more than three years, and then selling those shares and consequently being taxed at the CGT rate.
The anti-avoidance provisions in this regard are contained in section 9C(3) and close loopholes that such schemes could work around. In effect, they provide that section 9C (which makes the profits from the sale of shares held for at least three years subject to CGT, rather than income tax) does not apply where, firstly, the taxpayer was a “connected person”, as defined, in relation to the company which issued the shares and, secondly, where more than 50 per cent of the market value of the shares was attributable to immovable property held by the company for less than three years prior to disposal of the shares.
Gerald Seegers, a tax director at PricewaterhouseCoopers, says that section 9C of the Income Tax Act applies to the disposal of shares after 1st October 2007, and provides that the profits on the sale of such shares will (with a few stipulated exceptions) be automatically (without any election by the taxpayer) subject to capital gains tax and not income tax if they have been held for at least three years.
However, section 9C does not state the converse. It does not say that if a person sells shares within three years of acquiring them, he or she will automatically be subject to income tax. In other words, a person who sells shares after holding them for less than three years will still be entitled to argue (and will bear the onus of proving) that he is not a share-dealer or speculator, and that the profits ought to be subject to capital gains tax, not income tax.
Consequently, section 9C does not provide absolute certainty on whether CGT or income tax should be levied and is therefore not likely to eliminate all disputes and litigation between taxpayers and SARS in regard to the taxation of the profits on share sales.
In contrast to section 9B, the wider ambit of section 9C applies to the disposal of all shares in companies (except for a few limited categories) and members’ interests in close corporations, and not only to shares in JSE-listed companies as was previously the case. Secondly, under section 9C, the taxpayer is not given any election as to nature of the tax he wishes to pay, CGT versus income tax, as it is predetermined based on the period of holding.
The wide net of 9C means there will therefore be a relatively small range of share disposals that will fall outside its clear guidelines and could possibly give rise to disputes with SARS.
In any case, investors, who are prepared to hold onto shares for at least three years, will be able to sleep easy in the knowledge that their profits on ultimate disposal will be subject to CGT, and not income tax.
 

Copyright © Insurance Times and Investments® Vol:21.4 1st May, 2008
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