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  • Income Tax

    Tax Guide for Share Owners (Issue 7)

  • Tax Guide for Share Owners (Issue 7) i

    Tax Guide for Share Owners

    Preface This guide provides general guidance on the taxation of share owners. It does not go into the precise technical and legal detail that is often associated with tax, and should not, therefore, be used as a legal reference. It is not an “official publication” as defined in section 1 of the Tax Administration Act 28 of 2011 and accordingly does not create a practice generally prevailing under section 5 of that Act. It is also not a binding general ruling under section 89 of Chapter 7 of the Tax Administration Act. Should an advance tax ruling be required, visit the SARS website for details of the application procedure.

    The guide examines –

    • the tax consequences of holding shares as trading stock compared to holding them as capital assets;

    • how to distinguish between profits of a capital and revenue nature using common law principles and statutory rules;

    • the determination of a taxpayer’s liability for capital gains tax;

    • how dividends are taxed; and

    • various corporate actions that can impact on the determination of a person’s liability for tax.

    This guide is based on legislation as at 15 January 2020 and primarily focuses on the 2020 year of assessment although much of the commentary will also apply to earlier years of assessment.

    For more information you may –

    • visit the SARS website at www.sars.gov.za;

    • visit your nearest SARS branch;

    • contact your own tax advisor or tax practitioner;

    • contact the SARS National Contact Centre –

     if calling locally, on 0800 00 7277; or

     if calling from abroad, on +27 11 602 2093 (only between 8am and 4pm South African time).

    Comments on this guide may be sent to policycomments@sars.gov.za.

    SOUTH AFRICAN REVENUE SERVICE Date of 1st issue: February 2006 Date of 2nd issue: May 2008 Date of 3rd issue: 27 March 2012 Date of 4th issue: 17 February 2014 Date of 5th issue: 16 February 2017 Date of 6th issue: 5 November 2018 Date of 7th issue: 21 February 2020

    http://www.sars.gov.za/ mailto:policycomments@sars.gov.za

  • Tax Guide for Share Owners (Issue 7) ii

    Contents Preface ................................................................................................................................... i Glossary ............................................................................................................................... 1 1. Introduction .............................................................................................................. 1 2. Income tax v capital gains tax ................................................................................. 2 3. Capital v revenue ...................................................................................................... 3 3.1 Criteria for distinguishing between revenue and capital profits ................................... 3 3.2 Intention ..................................................................................................................... 4 3.2.1 Intention ..................................................................................................................... 4 3.2.2 Mixed intentions ......................................................................................................... 4 3.2.3 Secondary purpose .................................................................................................... 4 3.2.4 Change in intention..................................................................................................... 4 3.3 Some general principles ............................................................................................. 5 3.3.1 Scheme of profit-making ............................................................................................. 5 3.3.2 Fortuitous gains .......................................................................................................... 5 3.3.3 The “for keeps” test .................................................................................................... 5 3.4 Surrounding circumstances ........................................................................................ 5 3.4.1 The transaction-by-transaction approach .................................................................... 5 3.4.2 Shares acquired for dividend income .......................................................................... 5 3.4.3 Scale and frequency of transactions ........................................................................... 5 3.4.4 Forced sales shortly after purchase ............................................................................ 6 3.4.5 Insufficient funds ........................................................................................................ 6 3.4.6 Low or nil return .......................................................................................................... 6 3.4.7 A once-off venture can comprise a trade .................................................................... 6

    4. Income tax ................................................................................................................ 6 4.1 Shares held as trading stock ...................................................................................... 6 4.2 Employee share incentive schemes ........................................................................... 8 4.2.1 Shares or options acquired before 26 October 2004 (section 8A) ............................... 8 4.2.2 Broad-based employee share plans (section 8B) ....................................................... 9 4.2.3 Shares and options acquired on or after 26 October 2004 (section 8C) .................... 10 4.3 Taxation of dividend income ..................................................................................... 11 4.3.1 Local dividends ......................................................................................................... 11 4.3.2 Foreign dividends ..................................................................................................... 13

    5. Capital gains tax ..................................................................................................... 18 5.1 Shares held as capital assets ................................................................................... 18 5.2 The three-year rule ................................................................................................... 19 5.3 Determining a capital gain or loss ............................................................................. 21 5.4 Disposal ................................................................................................................... 21 5.5 Proceeds .................................................................................................................. 22 5.6 Base cost ................................................................................................................. 22 5.6.1 Identification methods ............................................................................................... 22 5.6.2 Amounts included in base cost ................................................................................. 24 5.6.3 Pre-valuation date shares ......................................................................................... 24 5.6.4 Gain and loss limitation rules (the “kink tests”) .......................................................... 29 5.6.5 Distributions in specie ............................................................................................... 29 5.6.6 Base cost of shares in foreign companies ................................................................ 30 5.7 Determining a taxable capital gain or assessed capital loss ..................................... 32 5.7.1 The basic computation ............................................................................................. 32 5.7.2 Annual exclusion ...................................................................................................... 32 5.7.3 Assessed capital loss ............................................................................................... 33

  • Tax Guide for Share Owners (Issue 7) iii

    5.8 Return of capital ....................................................................................................... 34 5.9 Anti-loss rules ........................................................................................................... 41 5.9.1 Losses arising from extraordinary dividends ............................................................. 41 5.9.2 “Bed and breakfast” sales ......................................................................................... 43

    6. Corporate restructuring events ............................................................................. 43 6.1 Unbundling transactions ........................................................................................... 43 6.2 Asset-for-share transactions ..................................................................................... 45 6.3 Amalgamation transactions ...................................................................................... 46 6.4 Share buy-backs ...................................................................................................... 46 6.5 Capitalisation shares ................................................................................................ 46 6.6 Subdivision and consolidation of shares ...

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