Mainly Shares s9C and linked CG etc

Question 1

Prevention of anti-avoidance through dividend stripping

- CIR v Nemojin

Answer 1

Nemojin would purchase non-trading companies, issue dividends to itself to drain reserves and then sell the company

The court looked to CIR v Genn:
In order to determine how expenditure is properly regarded, must consider:
- the closeness of the expenditure with the income earning operation
- the purpose of the expenditure
- what it actually effects

Nemojin expenditure had a dual purpose:
- to sell
- to earn dividends
Thus expenditure must be apportioned:
purchase price x SP/(SP+dividends)

the basic principle is that expenditure is only deductible to the extent it is incurred with the intention of earning income as defined

Question 2

s9C

Answer 2

• If a taxpayer holds an equity share for at least three years, both the cost and proceeds are deemed to be capital in nature when that share is disposed of.

Section 9C does not require a transfer from trading stock when the three-year mark is reached. The shares continue to be included in opening and closing stock until sold.

When sold:
• Disposals are deemed to be on a FIFO basis for section 9C
• An amount equal to the cost of the share is included in income – section 9C(5)
• There is no section 22(8) inclusion – section 9C(7) (otherwise the cost would be added
back twice)
• The proceeds on disposal are deemed to be capital in nature
• Amount included in income in terms of section 9C becomes the base cost – para 20(1)(a) & (3)(a)(ii)

Question 3

Shares issued to pay for transactions

Answer 3

In SARS v Labat the court ruled that shares issued as payment in a transaction do not constitute expenditure “actually incurred” because it costs the company nothing to issue them. Therefore, no section 11(a) deduction arises.

Question 4

s40CA - Acquisition of assets in exchange for shares or debt issued

Answer 4

The cost of the asset deemed to be the market value of the shares after the transaction.
+ 24BA Capital gain (if MV asset> mv shares)

For the seller of the asset, the cost of the share is equal to the market value of the asset
less the Deemed cap gain by company if mv asset>mv shares

This makes sense because the persons proceeds would have been mv of shares which was lower than his asset and thus avoided cgt tax

Question 5

s24BA - Transactions where assets are acquired as consideration for shares issued

Answer 5

If MV asset > MV shares (i.e. value shifted to the company) – section 24BA(3)(a)

• Difference deemed to be capital gain by the company
• Cost or base cost of shares for recipient share holder reduced by difference

If MV shares > MV asset (i.e. value shifted to shareholder) – section 24BA(3)(b)
- Difference deemed dividend in specie for dividends tax purposes

s24BA doesn’t apply where:

• p.38 of Eighth Schedule applies (deems disposal of asset to be MV)
• the company and recipient SH are part of the same group, or where the recipient SH holds all the shares in the company

Question 6

s40C - Issue of shares or granting of rights or options for no consideration

Answer 6

the expenditure incurred by the recipient SH is deemed to be Nil.

Question 7

p.32 - Base cost of identical assets

Answer 7

base cost must be determinded using on of the methods

• specific identification
• FIFO
• Weighted average (for some assets only) eg. cant be used for unlisted shares

Question 8

p.75, p.76 - Dividends in specie

Answer 8

Company is deemed to have disposed of the asset given at the date of distribution at the market value of the asset

The recipient SH to have incurred expenditure equal to that market value in acquiring it.

Question 9

p.77 - Liquidation or Deregistration

Answer 9

SH deemed to have disposed of on the earlier of:

a) the date of dissolution or deregistration or
b) in the case of liquidation/winding-up, when the liquidator declares in writing that no reasonable grounds exist to believe that any further distributions will be made

Any CTC received after the appropriate date is treated as a further capital gain

Question 10

p.64B - Disposal of equity shares in foreign companies + s9H(3)(e) & (f)

Answer 10

A gain or loss of the disposal of equity shares in a foreign company may be disregarded, but only if:
• At least 10% of the shares were held by the taxpayer (or together with other group companies)
• And they were held for at least 18 months prior to disposal (unless they were acquired from another group company, in which case together they must have held them for 18 months)
• And they were sold to a non-resident for an amount equal to or greater than their market value.

s9H(3)(e) & (f):
Companies who cease to be resident must reverse any para 64B gains disregarded and any s10B(2) foreign dividend exemptions claimed in the last three years. This is typically referred to as a “claw-back”

These are reversed by recognised a capital gain or an amount equal to the dividend in income in the current year. Any foreign dividend recognised may at that point be subject to the section 10B(3) partial exemption.

Question 11

Returns of CTC prior to disposal:

p.76B - reduction in the base cost of shares as a result of distributions

Answer 11

p. 76B(2)
- the amount of CTC received/returned is not taxed when received.
- instead the amount of CTC is removed from the base cost of the shares

p. 76B(3)
- if the CTC returned exceeds the base cost of the shares, the difference is recognised as a Capital Gain immediately and the base cost is reduced to Nil.

p. 76B(1): shares purchased pre 01/10/01
- the share is deemed to be sold at MV immediately before distribution
- deemed to be immeditately reacquired for the same MV
- this new base cost is reduced by the capital gain from the deemed disposal