n Business Tax and Company Law Quarterly - Recharacterisation rules for dividend income

Volume 4, Issue 3
  • ISSN : 2219-1585


The Taxation Laws Amendment Act 22 of 2012 has finally sought to rectify the intention of National Treasury to remedy the rules relating to 'hybrid equity instruments' and 'third-party backed shares'. It won't be surprising if further amendment is undertaken to at least clarify the application of certain definitions within the new rules.

The addition to section 8E of the Income Tax Act 58 of 1962 ('the Act') seeks to add to the definition of 'hybrid equity instruments', 'preference shares', as defined, that are secured by interest-bearing debt instruments or other financial arrangements that bear a debt-like feature. The advent of a 'hybrid equity instrument' at any time during the holder's tax year will cause the dividend income throughout the tax year to be taxable. Section 8EA applies to 'preference shares', the dividend income or return of capital of which is secured by a third party unrelated to the issuer.
The addition to section 8E and the new section 8EA will be disenabled if the preference shares are issued for a 'qualifying purpose'.
This article summarises the impact of these two additions to the Act, provides considered views on certain aspects of the provisions, and illustrates the application of certain of the provisions by practical example.

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