Gerald Seegers, a tax director at PricewaterhouseCoopers, says that section 9C of the Income Tax will now replace section 9B in relation to the disposal of shares on or after 1 October 2007. The purpose of section 9C is to broaden the category of share disposals that will be deemed to be subject to Capital Gains Tax (CGT), instead of income tax, and to make the new provisions applicable without any election having to be made by the taxpayer.
Whereas section 9B applied only to the disposal of JSE-listed shares, section 9C will apply to all shares (except for a few limited categories) and to members’ interests in close corporations.
The general rule is that the profits from the disposal of shares to which section 9C applies will be subject to capital gains tax, and not income tax. The rate of capital gains tax is favourably lower than that of income tax.
However, some anti-avoidance provisions were necessary to prevent property speculators (who pay the higher income tax on their profits) from getting the benefits of section 9C and paying the lower CGT on their profits.
One way around section 9C would have been to buy property and place this in a company or close corporation whose shares they had already held for more than three years, and then selling those shares and consequently being taxed at the CGT rate.
The anti-avoidance provisions in this regard are contained in section 9C(3) and close loopholes that such schemes could work around. In effect, they provide that section 9C (which makes the profits from the sale of shares held for at least three years subject to CGT, rather than income tax) does not apply where, firstly, the taxpayer was a “connected person”, as defined, in relation to the company which issued the shares and, secondly, where more than 50 per cent of the market value of the shares was attributable to immovable property held by the company for less than three years prior to disposal of the shares.
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