By Stephan Spamer (ENS Tax Ensight)
A revised draft of the TLAB 2012 contains the final draft of section 8E (hybrid equity instruments) and section 8EA (third party-backed shares).
In the 2012 Taxation Laws Amendment Bill, which was first made available for comment on 13 March 2012, the long-awaited proposed amendments to sections 8E and 8EA of the Income Tax Act, No 58 of 1962, were published. Following discussions with the general public a revised draft of the Bill was issued on 25 October 2012, which now contains the final proposed amendments. In terms of the new proposals both sections will apply to dividends and foreign dividends received or accrued during years of assessment commencing or after 1 January 2013. However, the implementation of the sections will be extended to 1 April 2013 to give taxpayers a final opportunity to get their affairs in order.
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 must be deemed in relation to that person to be an amount of income accrued to that person if that share constitutes a hybrid equity instrument at any time during that year of assessment. 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 the 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 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 preference 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. A preference share for purposes of sections 8E and 8EA means a share other than an equity share or an equity share if the amount of any dividend (or foreign dividend) in respect of such share is based on or determined with reference to a specified rate of interest or the time value of money. This means that the original proposal, in terms of which these sections would have applied to any share, has been removed.
However, because both sections 8E and 8EA apply to any dividends (and foreign dividends) declared after 1 January 2013 (as opposed to shares issued after 1 January 2013), it still has the effect that every share structure on which dividends will be declared during years of assessment commencing or after 1 January 2013, must be scrutinised to determine whether such shares will be subject to the application of sections 8E and 8EA. 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, and it is therefore recommended that appropriate advice is sought as soon as possible to ensure that steps are taken to implement the necessary amendments prior to 1 April 2013.
Regrettably, the drafters of these sections have not been able to simplify the wording of these sections, despite the alignment of the definitions in the latest draft. As a result the sections remain quite difficult to interpret, let alone to apply to share structures. Accordingly and 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 falls within any of the these provisions.