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Is there an exemption for interest income re-classified as a dividend?

30 January 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: I have a query regarding section 8F of the Income Tax Act (ITA) and its interaction with section 64FA of ITA. Section8F of ITA reclassifies interest to a dividend in specie for purposes of the Act. The question is whether the dividend in specie is exempt where it is paid from one SA company to another SA resident company. The wording of section 64FA of ITA is a problem in this regard in that if the payment ‘had not constituted a dividend in specie’ it would have been interest, not a cash dividend.

Do you have any insight into whether SARS in practice lets companies claim the exemption from DT in such circumstances, notwithstanding the wording of s64FA?

A: We agree that the wording in section 64FA(1)(a)(i) of the ITA is problematic, as the amount distributed would not have qualified for exemption under section 64F of the ITA, if it was not a dividend in specie under s64FA as noted.

We are not aware of any current SARS practice in this regard and a similar problem exists for section 8FA of the ITA. However both provisions are still new (i.e. effective dates of 1 April 2014) so we probably will only start seeing SARS practice on assessment during 2015 or 2016.

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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