High tax for share disposing

2011-12-22 00:00

COMPANIES might have to pay higher income tax when disposing shares in another company.

Proposed changes contained in the Taxation Laws Amendment Bill of 2011 will result in potential higher income tax to be paid when a company disposes shares held in another company. The proposed Income Tax Act changes are contained in paragraph 43A of the Eighth Schedule and section 22B.

In a nutshell, any exempt dividend that is received by or accrued to the disposer of the shares within 45 days of the date of the disposal must be added to proceeds on disposal of the share (if the share is held as a capital asset) or be accounted for as additional income (if the share is held as a revenue asset).

Also, changes have been made to the above provisions which will result in the application of the provisions in the case of the disposal of foreign as opposed to local shares.

This result is obtained by reading the provisions in the absence of certain glitches which have crept into the wording of the Bill and which he believes will be rectified so as to give the above effect.

Section 22B and paragraph 43A represent anti-dividend stripping legislation aimed at preventing the diminution of the value of shares and hence a reduced capital gains tax or revenue charge on disposal of the shares, by the declaration of dividends prior to disposal of the shares.

At present the rules apply in circumstances where funding is received from the acquirer of the shares within a period of 18 months prior to the disposal of the shares.

The proposal represents a considerable broadening of the rules as there is no requirement that funding must have been received from the acquirer of the shares: any exempt dividend received or accrued within 45 days of the date of disposal of the shares would automatically be hit.

In addition, the current rules would be retained to apply in the alternative.

The proposal is set to apply from the date to the date of coming into operation of the dividends tax.

If the proposal is enacted as set out above, we are likely to see a deferral in the dates of disposal of shares till after the 45 day period in such circumstances. — Moneywebtax.

*David Warneke is a tax partner at BDO South Africa.

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