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Sections 8E & 8EA Of Income Tax Act Finalised
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. Taxand South Africa discusses what the new sections will involve.
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 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. 8EA 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 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.
Regrettably, the drafters of these sections have not been able to simplify the wording, 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.
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. Multinationals and resident corporations alike should ensure appropriate advice is sought as soon as possible to ensure that steps are taken to implement the necessary amendments prior to 1 April 2013.