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