n Business Tax and Company Law Quarterly - The ambit of section 8E of the income tax act - The meaning and the mischief

Volume 2 Number 2
  • ISSN : 2219-1585


Section 8E of the Income Tax Act is one of the important anti-avoidance measures that are a common feature of the statute. The provision deems dividends declared on certain shares, defined as 'hybrid equity instruments', that would otherwise be tax exempt, to be taxable interest in the hands of the recipient. The underlying premise of this provision is that short-term share investments, which are redeemable by the investor within a period of three years, are in effect loans and should be treated as such for tax purposes. It is common in South Africa for companies to obtain financing by the issue of redeemable preference shares subscribed for by banks and other financiers for periods exceeding three years, and indeed for as long as five to ten years. Such preference share investments do not usually fall within the ambit of section 8E because they do not qualify as 'hybrid equity instruments', there being no obligation on the issuer company to redeem the shares, nor any right of the holder to redeem them at its option, or to dispose of them, Instead a 'safe harbour' period of more than three years is applicable to the redemption of such shares. This article is concerned with a situation that may commonly occur in practice, where there has been an issue of preference shares redeemable within a period in excess of three years, and after a lapse of more than three years from the date of their initial issue, but before the redemption date has been reached, the parties wish to extend the redemption date to a later date in the future. The thesis of this article is that such a change does not trigger the application of section 8E. In support of that conclusion, the article analyses the definitions that are pivotal to section 8E. It argues that the extended meaning assigned to the term 'date of issue' seeks to catch in the provision's net preference shares the terms of which when issued do not initially provide for their redemption or disposal, but after their issue do so by virtue of a subsequent undertaking by the issuer to redeem, or the subsequent acquisition by the holder of a right to require redemption or to dispose of the shares, (none of which previously existed), within a period of three years of such undertaking or aquisition. The article further contends that, having regard to the real mischief at which section 8E is aimed - short-term redeemable share investments that are in reality loans - there is no justification for treating the preference shares as hybrid equity instruments where the parties agree to extend the redemption date after the 'safe harbour' threshold has been passed, and that the proper construction of section 8E militates against this. Finally, the article discusses an exchange of correspondence concerning section 8E between the late David Meyerowitz SC, when he was the editor of , and SARS, as revealed in an article in that journal in 2008. From this it emerges that the broad interpretation given to the provision by SARS is unsupported by reasons and questionable, and that the late learned author also favoured the restricted construction contended for in this article. Postscript : The recently released Draft Taxation Laws Amendment Bill, 2011 proposes to extend the three-year period to ten years.

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