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Income Tax Act, 1962 (Act 58 of 1962)

Chapter II: The Taxes

Part I: Normal Tax

8EA. Dividends on third-party backed shares deemed to be income in relation to recipients thereof

 

(1)        For the purposes of this section—

 

"enforcement obligation"

in relation to a share or equity instrument means any obligation, whether fixed or contingent, of any person other than the issuer of that share or instrument to—

(a) acquire that share or equity instrument from the holder thereof;
(b) make any payment in respect of that share or equity instrument in terms of a guarantee, indemnity or similar arrangement; or
(c) procure, facilitate or assist with any acquisition contemplated in paragraph (a) or the making of any payment contemplated in paragraph (b);

[Definition substituted by section 15(1)(a) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016)]

 

"enforcement right"

in relation to a share or equity instrument means any right, whether fixed or contingent, of the holder of that share or equity instrument or of any person that is a connected person in relation to that holder to require any person other than the issuer of that share or equity instrument to—

(a) acquire that share or equity instrument from the holder;
(b) make any payment in respect of that share or equity instrument in terms of a guarantee, indemnity or similar arrangement; or
(c) procure, facilitate or assist with any acquisition contemplated in paragraph (a) or the making of any payment contemplated in paragraph (b);

[Definition substituted by section 15(1)(b) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016)]

 

"equity instrument"

means a right or interest the value of which is determined directly or indirectly with reference to—

(a) a preference share; or
(b) an amount derived from a preference share;

[Definition inserted by section 15(1)(c) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016)]

 

'operating company'

means—

(a) any company that carries on business continuously, and in the course or furtherance of that business—
(i) provides goods or services for consideration; or
(ii) carries on exploration for natural resources;

[Paragraph (a) amended by section 7(1)(a) of Act No. 43 of 2014]

(b) any company that is a controlling group company in relation to a company contemplated in paragraph (a); or
(c) any company that is a listed company;

 

'preference share'

means any share—

(a) other than an equity share; or
(b) that is an equity share, if an amount of any dividend or foreign dividend in respect of that share is based on or determined with reference to a specified rate of interest or the time value of money;

 

'qualifying purpose',

in relation to the application of the funds derived from the issue of a preference share, means one or more of the following purposes:

(a) The direct or indirect acquisition of an equity share by any person in a company that is an operating company at the time of the receipt or accrual of any dividend or foreign dividend in respect of that preference share, other than a direct or indirect acquisition of an equity share from a company that, immediately before that acquisition, formed part of the same group of companies as the person acquiring that equity share;

[Paragraph (a) substituted by section 15(1)(d) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016)]

(b) the partial or full settlement by any person of any—

(i)        debt incurred for one or more of the following purposes:

(aa) the direct or indirect acquisition of an equity share by any person in a company that is an operating company at the time of the receipt or accrual of any dividend or foreign dividend in respect of that preference share, other than a direct or indirect acquisition of an equity share from a company that, immediately before that acquisition, formed part of the same group of companies as the person acquiring that equity share;

[Paragraph (b)(i)(item (aa)) substituted by section 15(1)(e) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016)]

(cc) a direct or indirect acquisition or a redemption contemplated in paragraph (c);
(dd) the payment of any dividend or foreign dividend as contemplated in paragraph (d); or
(ee) the partial or full settlement, directly or indirectly, of any debt incurred as contemplated in item (aa), (bb) or (cc); or

(ii)        interest accrued on any debt contemplated in subparagraph (i);

(c)        the direct or indirect acquisition by any person or a redemption by any person of any other preference share if—

(i) that other preference share was issued for any purpose contemplated in this definition; and
(ii) the amount received by or accrued to the issuer of that preference share as consideration for the issue of that preference share does not exceed the amount outstanding in respect of that other preference share being acquired or redeemed, being the sum of—
(aa) that amount; and
(bb) any amount of dividends, foreign dividends or interest accrued in respect of that other preference share; or
(d) the payment by any person of any dividend or foreign dividend in respect of the other preference share contemplated in paragraph (c);

[Definition amended by section 7(1)(b) of Act No. 43 of 2014]

 

'third-party backed share'

means any preference share or equity instrument in respect of which an enforcement right is exercisable by the holder of that preference share or equity instrument 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 or equity instrument not being received by or accruing to any person entitled thereto

[Definition substituted by section 15(1)(f) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016)]

 

(2) Any dividend or foreign dividend received by or accrued to a person during any year of assessment in respect of a share or equity instrument must be deemed in relation to that person to be an amount of income received by or accrued to that person if that share or equity instrument constitutes a third-party backed share at any time during that year of assessment.

[Subsection (2) substituted by section 15(1)(g) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016)]

 

(2A) Where a preference share that was issued in terms of an agreement, all the terms of which were finally agreed to before 1 April 2012 by all the parties to that agreement, constitutes a third-party backed instrument solely by reason of an enforcement right acquired in accordance with the terms of that agreement and that enforcement right is cancelled on or after 26 October 2016 and on or before 31 December 2017, the provisions of subsection (2) will not apply in respect of any dividend or foreign dividend that accrues in respect of that share after the date of cancellation of that enforcement right.

[Subsection (2A) inserted by section 15(h) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016)]

 

(3)        

(a) Where the funds derived from the issue of a preference share were applied for a qualifying purpose, in determining whether—
(i) an enforcement right is exercisable in respect of that share, no regard must be had to any arrangement in terms of which the holder of that share has an enforcement right in respect of that share and that right is exercisable; or
(ii) an enforcement obligation is enforceable in respect of that share, no regard must be had to any arrangement in terms of which that obligation is enforceable,

against the persons contemplated in paragraph (b).

(b) For the purposes of the determination contemplated in paragraph (a) no regard must be had to the following persons:
(i) The operating company to which that qualifying purpose relates;
(ii) any issuer of a preference share if that preference share was issued for a qualifying purpose;

[Subparagraph (ii) amended by section 7(1)(c) of Act No. 43 of 2014]

(iii) any other person that directly or indirectly holds at least 20 per cent of the equity shares in—
(aa) the operating company contemplated in subparagraph (i); or
(bb) the issuer contemplated in subparagraph (ii);
(iv) any company that forms part of the same group of companies as—
(aa) the operating company contemplated in subparagraph (i);
(bb) the issuer contemplated in subparagraph (ii); or
(cc) the other person that directly or indirectly holds at least 20 per cent of the equity shares in the operating company contemplated in subparagraph (i) or the issuer contemplated in subparagraph (ii);
(v) any natural person;
(vi) any organisation—

(aa) which is—

(A) a non-profit company as defined in section 1 of the Companies Act; or

(B) a trust or association of persons; and

(bb) if—

(A) all the activities of that organisation are carried on in a non-profit manner; and
(B) none of the activities of that organisation are intended to directly or indirectly promote the economic self-interest of any fiduciary or employee of that organisation, otherwise than by way of reasonable remuneration payable to that fiduciary or employee; or
(vii) any person that holds equity shares in an issuer contemplated in subparagraph (ii) if—
(aa) that issuer used the funds provided by that person solely for the acquisition by that issuer, other than from a company that immediately before that acquisition formed part of the same group of companies as the issuer, of equity shares in an operating company; and
(bb) the enforcement right exercisable or enforcement obligation enforceable against that person is limited to any rights in and claims against that issuer that are held by that person.

[Subparagraph (vii) inserted by section 7(1)(d) of Act No. 43 of 2014]