Two of the provisos to the dividend exemption contained in section 10(1)(k)(i) have been amended by the TLAA.
Proviso (gg) to the dividend exemption has been amended to clarify that the proviso applies to dividends received by a company that simultaneously holds a long and a short position on the same or equivalent shares, and receives or accrues a dividend in respect of the shares held long. This amendment applies retrospectively from 1 April 2014 in respect of years of assessment commencing on or after this date.
Proviso (hh) to the dividend exemption has been amended. This proviso applies to a company that receives or accrues dividend income in instances where it incurs deductible expenditure calculated with reference to such dividend. In terms of the amendments, a dividend will also not be exempt to the extent that, inter alia, it does not exceed any amount taken into account that has the effect of reducing income of a covered person in terms of section 24JB(2).
In terms of a further amendment to proviso (hh), the dividend will not be exempt if the expenditure or reduction in question is determined directly or indirectly with reference to the dividend in respect of a share of the same kind and of the same or equivalent quality as that share.
Hybrid debt – uncertainty between the interaction between section 8F/8FA and section 24J
Section 8F applies to "hybrid debt instruments", and section 8FA applies to "hybrid interest”. Section 8F and 8FA provide that any amount of interest incurred by a company on a hybrid debt instrument and/or hybrid interest is, for purposes of the Act, deemed to be a dividend in specie declared and paid by the company in question.
"Interest” as contemplated in section 8F and 8FA is defined as meaning interest as defined in section 24J of the Act. This term is in turn defined as including:
any interest or related finance charges, discount or premium payable or receivable;
certain amounts payable by a borrower to the lender in terms of a lending arrangement; and
the difference between amounts receivable and payable in terms of certain sale and leaseback arrangements.
Section 24J of the Act effectively spreads the "interest” (as defined) over the period or term of the financial arrangement by compounding the interest over fixed accrual periods using a predetermined rate referred to as the "yield to maturity”. In particular, section 24J deems the issuer and the holder of an instrument to have incurred or accrued (as the case may be) amounts of interest in a relevant year of assessment calculated by applying the abovementioned principles. These amounts of interest calculated in terms of section 24J can differ from the "stated” interest in terms of an instrument.
The Act is currently not clear on whether the provisions of section 8F and 8FA apply to recharacterise amounts of interest equal to the stated interest in respect of the relevant instrument, or the amounts of interest as determined in accordance with section 24J of the Act. Furthermore, the Act is silent on how recharacterised amounts are taken into account for purposes of determining, inter alia, accrual amounts and adjusted gains and losses in terms of section 24J of the Act.
This could result in tax implications arising for the taxpayer in instances where the stated interest in respect of an instrument differs to the amount of interest calculated in terms of section 24J of the Act. Complications could also arise when applying the principles of section 8F and/or section 8FA in conjunction with the provisions of section 24J of the Act throughout the term of the instrument, as well as upon redemption or transfer of the instrument.
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