Section 9C of the Income Tax Act came into operation on 1 October 2007 and applies to the disposal of 'qualifying shares' on or after that date. Section 9C of Income Tax Act essentially contains a 'safe harbour' provision in terms of which the gains from the disposal of 'qualifying shares' will be deemed to be of a capital nature if the owner held such shares for a continuous period of 3 (three) years.
The Minister announced in the Budget that the provisions of section 9C of the Income Tax Act do not currently deal with the circumstances where there is a return of capital by the company in respect of 'qualifying shares' and that there is a need to amend the definition of 'disposal ' for purposes of this section.
Having regard to the proposed amendments by the Minister, it is noted that:
- The provisions of section 9C are triggered upon the 'disposal' of a 'qualifying share'. In the case of a return of capital by a company, there is no 'disposal' of the 'qualifying share' by the shareholder as the shareholder continues to hold the share in the company. In the case of a return of capital, the trigger for the application of section 9C therefore cannot be the 'disposal' of the share and has to be amended.
- In terms of the current provisions contained in the Eighth Schedule to the Income Tax Act, a return of capital by the company on or after 1 April 2012 will result in a reduction of the base cost of the shares held by the shareholder. To the extent that the return of capital made by the company is greater than the base cost of the shares, the provisions of section 9C of the Act do not currently deem that return of capital to be on capital account for the shareholder (ie even if the qualifying shares have been held for a continuous period of 3 years). In terms of the proposed amendment, this portion of the return of capital will be deemed to be capital in nature and subject to capital gains tax.
The expansion of the provisions of section 9C of the Act to provide a safe harbour for returns of capital will be welcomed by taxpayers. Taxpayers must be aware that the provisions will most likely only apply to 'qualifying shares' as defined in s9C of the Income Tax Act (eg a 'qualifying share' does not include most preference shares).