Act current to 2023-06-12 and last amended on 2023-05-11. Based on the study performed, however, the context of Sections 7(2) to 7(8) of the Act sometimes indicates a different meaning. Contribution by Central Government or other employer under pension scheme of Section 80CCD, Employer contribution and interest amount which is transferred from unrecognized Provident Fund to recognized Provident Fund. This example clearly illustrates the significant impact that the interpretation of the term 'income' in Sections 7(2) to 7(8) can have on a taxpayer's 'taxable income' and for which a suitable solution is required to ensure consistency. Latest updated notes and news for CMA Foundation, Intermediate and Final Course students and qualified members of The Institute of Cost Accountants of India (ICAI). Income from employment 5. All statutory references are to the Income Tax Act, unless otherwise noted. n(4) SA 271 (WLD). (2)If a security is held by a trustee in trust or otherwise, whether absolutely, conditionally or contingently, for an employee, the employee is deemed, for the purposes of this section and paragraphs 110(1)(d) to (d.1), (a)to have acquired the security at the time the trust began to so hold it; and. [Links], Republic of South Africa, 1941, Income Tax Act 31 of 1941, Government Printer, Pretoria. Tax Laws & Rules > Acts > Income-tax Act, 1961, Direct Taxes Code 2010 (Bill No. He was of the opinion that it was reasonable to accept that the legislature's intention was that a husband (later 'donor spouse') should pay tax on his wife's (later 'recipient spouse') profits or gains after deducting allowable expenditure (in other words 'taxable income') and not on her 'income' as defined. ]. Prior to the introduction of the section, South African tax residents were able to artificially shift assets offshore (sometimes to low tax jurisdictions), and exclude income derived from those assets from the South African tax net. of investors funds. Budget 2022 Will this be the end of capital gains planning? A taxpayer transfers an investment to his spouse, a homemaker, so that she rather than he can be taxed on the profits of this investment. PDF INCOME TAX ACT, 2015 (ACT 896) As Amended by INCOME TAX (AMENDMENT) ACT (ii)the total of all amounts each of which is an amount received by the taxpayer before the particular time in respect of the cessation. The various authors' possible interpretations of the term 'income' discussed in Section 7(3), which also apply in the context of Section 7(5), include 'taxable income', 'gross income' less related expenses and losses and 'gross income'. A non-empirical study of existing literature was conducted by performing a historical analysis within a South African context. Business Rescue, erroneous instrument. Melamet J in Leyland (SA) (Pty) Ltd v Rex Evans Motors (Pty) Ltd When a foreign trust derives income in consequence of a donation, settlement or other disposition by a donor and the trust vests that income, or a portion of it, in a resident beneficiary, a conflict arises because the amount is potentially economically taxed twice herein lies the uncertainty as to how the provisions interact with each other. Other notable amendments to Section 7 include: the addition of Sections 7(2B) and 7(8)(b) to allow any deduction or allowance relating to the income, in the hands of the spouse (or resident, in the case of Section 7[8]) that is being taxed on the deemed income (Republic of South Africa 1992, 2005a) and the amendment of Section 7(8) to refer to 'any amountwhich would have constituted income' instead of to 'income' (Republic of South Africa 2004a). Section 7(6) of the Act (Republic of South Africa 1962) reads as follows: If any deed of donation, settlement or other disposition contains any stipulation that the right to receive any income thereby conferred may, under powers retained by the person by whom that right is conferred, be revoked or conferred upon another, so much of any income as in consequence of the donation, settlement or other disposition is received by or accrues to or in favour of the person on whom that right is conferred, shall be deemed to be the income of the person by whom it is conferred, so long as he retains those powers. Various academic writers have identified the lack of guidance from the South African government regarding the meaning of the term 'income', as used in Sections 7(2) to 7(8). (iii)a corporation formed on the amalgamation or merger of the particular qualifying person and one or more other corporations, (iv)a mutual fund trust to which the particular qualifying person has transferred property in circumstances to which subsection 132.2(1) applied, or, (v)a qualifying person with which the corporation referred to in subparagraph (iii) does not deal at arms length immediately after the disposition or exchange, and. The literal approach to the interpretation was described in the judgement of Cape Brandy Syndicate v Inland Revenue Commissioners K.B. Remember Section 7? - Exceed However, such income , being income of an Indian company, whose global income is liable to tax in India, may otherwise be taxable in India. [Links], Republic of South Africa, 2004a, Revenue Laws Amendment Act 32 of 2004, Government Printer, Pretoria. Following the aforementioned, the ordinary (literal) meaning of the term 'income' will be referred to, unless it is in conflict with the intention of the legislature and the Bill of Rights. [Links], Clegg, D. & Stretch, R., 2007, Income Tax in South Africa, Electronic edition updated: September 2015, LexisNexis, viewed 18 November 2015, from http://www.mylexisnexis.co.za.ez.sun.ac.za/Index.aspx[Links], Commissioner for Inland Revenue V Simpson [1949] 4 All SA 460(A). 2023 Cliffe Dekker Hofmeyr. (i)any particular rights of the employee under the arrangement in respect of those securities are deemed to be rights under a particular agreement with the particular person under which the particular person has agreed to sell or issue securities to the employee, (ii)any securities acquired under the arrangement by the employee or by a person in whom the particular rights have become vested are deemed to be securities acquired under the particular agreement, and, (iii)any amounts paid or agreed to be paid to the trustee for any securities acquired under the arrangement by the employee or by a person in whom the particular rights have become vested are deemed to be amounts paid or agreed to be paid to the particular person for securities acquired under the particular agreement; and. (a)no other securities that are identical to the particular security are acquired, or disposed of, by the taxpayer after the particular time and before the disposition; (b)the taxpayer identifies the particular security as the security so disposed of in the taxpayers return of income under this Part for the year in which the disposition occurs; and. He is a well recognised Trainer of International Tax and UAE Corporate Tax. The possible literal (ordinary) meaning of the term 'income' is assessed in terms of dictionaries, as well as from an accounting, general business and tax perspective. (d)the taxpayer is deemed (other than for the purposes of subparagraph (9)(d)(ii)) not to have disposed of the exchanged option and not to have acquired the new option, (e)the new option is deemed to be the same option as, and a continuation of, the exchanged option, and. In terms of the literal approach, the interpreter pays attention to the plain language of the provisions of the Act (De Koker & Williams 2015). In the recent Supreme Court of Appeal (SCA) judgment in Commissioner for the South African Revenue The Act, on the other hand, defines the term 'income' in Section 1 as 'gross income' less the exempted income, but before any deductions. Section 7 applies where a corporation has agreed to sell or issues shares to the employee. Under paragraph 110(1)(d), the employee is entitled to the deduction where: In the case of a CCPC or startup, it may not be possible to rely on the deduction under paragraph 110(1)(d) if the taxpayer is allowed to acquire shares for a nominal amount (that would violate point 4 above). Section 94(7) of Income Tax Act To avoid the practice of tax evasion using Dividend Stripping, the finance minister introduced Section 94(7) under Budget 2020. (f)if the designated person is not the particular person, the designated person is deemed to be the same person as, and a continuation of, the particular person. Similarly, uncertainty exists with regard to the meaning of the term 'income' throughout Sections 7(4) to 7(8), as illustrated below. Clegg and Stretch (2015) note that the interpretation of statutes is frequently a tough task and the rules of interpretation are not applied consistently. SETTING: This article examines existing literature in a South African income tax environment. (Republic of South Africa, 1962:43). (b) any income derived from the letting of fixed property and any income derived otherwise than from the carrying on of any trade shall be deemed to have accrued in equal shares to both spouses: Provided that any such income which does not fall into the joint estate of the spouses shall be deemed to be income accrued to the spouse who is entitled thereto. The study can potentially highlight areas for improvement or, at the very least, for a consideration by the South African Department of National Treasury to clarify the meaning of the term 'income' in Sections 7(2) to 7(8). The authors of this article believe that the legislature's intention, albeit possibly unfair in terms of not allowing deductions or exemptions throughout Section 7, was for the term 'income' to be interpreted as 'gross income' in Sections 7(2), 7(6) and 7(7) and as 'income' in Sections 7(3), 7(4), 7(5) and 7(8). Payment Marginal note:Disposition of newly-acquired security, (1.31)Where a taxpayer acquires, at a particular time, a particular security under an agreement referred to in subsection (1) and, on a day that is no later than 30 days after the day that includes the particular time, the taxpayer disposes of a security that is identical to the particular security, the particular security is deemed to be the security that is so disposed of if. forensic expert Tendai Jangara, together with her team comprising of two forensic investigators and Income Tax Act 1 - Short Title 2 - PART I - Income Tax 2 - DIVISION A - Liability for Tax 3 - DIVISION B - Computation of Income 3 - Basic Rules 5 - SUBDIVISION A - Income or Loss from an Office or Employment 5 - Basic Rules 6 - Inclusions 8 - Deductions 9 - SUBDIVISION B - Income or Loss from a Business or Property 9 - Basic Rules 12 - Inclusions Section 7(8) of the Income Tax Act was introduced to prevent South African taxpayers from avoiding tax on income received from foreign trusts by shifting assets offshore. Section 7 applies where a corporation has agreed to sell or issues shares to the employee. [Links], Republic of South Africa, 2004b, Explanatory Memorandum on the Revenue Laws Amendment Bill 2004, Government Printer, Pretoria. To the extent that South African taxpayers do not apply the provisions in accordance with the IN, it may create future tax issues that will potentially be costly and time-consuming to rectify. The taxpayer has not disposed of the share (except on death) or exchanged the share within two years after the date the taxpayer acquired the share; and. The benefit is included in the income in the year the option is exercised. Definitions Section - 3 "Previous year" defined Section - 4 Charge of income-tax Section - 5 Scope of total income Section - 5A Apportionment of income between spouses governed by Portuguese Civil Code Section - 6 Residence in India Section - 7 Income deemed to be received Section - 8 Dividend income Section - 9 is deemed to have been received, in the taxation year in which the employee acquired the securities, by the employee because of the employees employment; (b)if the employee has transferred or otherwise disposed of rights under the agreement in respect of some or all of the securities to a person with whom the employee was dealing at arms length, a benefit equal to the amount, if any, by which, (i)the value of the consideration for the disposition, (ii)the amount, if any, paid by the employee to acquire those rights. These explanatory notes describe certain amendments made to the Income Tax Act and the Income Tax Regulations by Bill C-2, tabled in Parliament on November 24, 2021. Please consult one of our lawyers on any specific legal problem or matter. Under the Indian tax laws, once an item of income is included in the assessees total income and subjected to tax on the ground that it has accrued/is deemed to accrue, it cannot again be included in the persons total income and subjected to tax either in the same or in a subsequent year on the ground of its receipt (whether such receipt is actual or deemed) , Income Deemed to be received in India Example. [Links], Republic of South Africa, 1962, Income Tax Act 58 of 1962, Government Printer, Pretoria. Interpretation Note 114 (IN) issued by the South African Revenue Service clarifies the interaction between sections 7(8) and 25B(1) of the Act, providing guidance on their correct application. Instructions for Form W-7 (11/2021) | Internal Revenue Service (b)if a taxpayer acquires, at the same time, two or more identical securities under circumstances to which subsection (1.1) applied, the taxpayer is deemed to have acquired the securities in the order in which the agreements under which the taxpayer acquired the rights to acquire the securities were made. Employee Stock Option Plans - Spectrum Lawyers (b) So much of any expenditure, allowance or loss incurred by the person contemplated in paragraph: (a) as does not exceed the amount included in the income of the resident in terms of that paragraph and which would be allowable as a deduction under this Act in the determination of the taxable income derived from that amount had that person been a resident, is deemed to be an expenditure, allowance or loss incurred by that resident for purposes of the determination of the taxable income of that resident from that amount. For the same reasons mentioned in the context of Section 7(3), the authors of this article also believe that the term 'income' in Section 7(4) should be interpreted as 'income' as defined in the Act. It accordingly becomes critical to correctly assess whether there is indeed a conflict, inconsistency or incompatibility between the provisions in order to understand whether section 7(8) must prevail (in the instance both provisions potentially apply), or whether section 25B(1) can be applied without regard to section 7(8). However, seen that Section 1 of the Act, which defines 'income', contains the words 'unless the context otherwise indicates', the defined meaning will not necessarily apply in all circumstances. For instance, it is questionable, according to the author, whether the deemed 'income' amounts of the non-resident funder can nevertheless be exempt from tax, if they comply with the provisions of Section 10 that are applicable to non-residents. During the year 2019-20, US Branch of ICO (an Indian Co.) receives income from consulting services provided in USA to a US resident. (iii)a corporation formed on the amalgamation or merger of the particular person and one or more other corporations. The authors of this article, however, agree with Davis et al. However, in the light of the fact that both Sections 7(2B) and 7(8)(b) specifically allow the deduction of expenses, it seems reasonable to the authors of this article to assume that such deductions are not allowed in the other subsections of Section 7. Section 7 of Income Tax Act for AY 2023-24 - AUBSP When certain conditions are met, the employee may deduct of the benefit deemed to have been realized. PDF The Income Tax Act, 2002 (2058) The study can potentially also assist taxpayers to understand this intended meaning, to correctly apply the provisions thereof in their tax returns. He does not pay taxes on his foreign income in South Africa, but only on his South African investments. (a)for the purposes of this section (other than subsection (2)) and paragraphs 110(1)(d) to (d.1). Section 7 of the Income Tax Act targets assets which are donated by a taxpaying person to another person with the intention of avoiding tax on the profits derived from these assets. Ambiguity or uncertainty arises where the meaning of the words used is unclear and can either be regarding individual words or an entire phrase (Clegg & Stretch 2015). In order for 7(1.1) to apply, the following conditions must be met: When an employee realizes a benefit under subsection 7(1) they may be entitled to a deduction of in calculating their taxable income under paragraphs 110(1)(d) or 110(1)(d.1). The amendment therefore ensures that all the receipts and accruals of a non-resident are deemed to be income of the resident, if they would have constituted income had they been received by or accrued to a resident (Republic of South Africa 2005b). An example of the impact of each possible interpretation, as discussed in the section 'Understanding the meaning of "income" in Sections 7(2) to 7(8) of the Act' of this article, is now provided to illustrate the effect of possible incorrect interpretations of the term 'income' in Sections 7(2) to 7(8) of the Act. Insolvency. In the next section, the article aims to outline the working of Sections 7(2) to 7(8) by investigating the possible meanings of the term 'income' as envisaged in each of these provisions. Advise relating to UAE Corporate Tax Issues; 2015; Meyerowitz 2008; Meyerowitz & Spiro 1995; Olivier 1989). The authors of this article are of the opinion that it must have been the legislature's intention that Sections 7(2) and 7(2A) referred to 'income' as defined, or to 'gross income', otherwise Section 7(2B) would not have been added to specifically allow for the deduction of expenditure. However, it was proposed in 2000 that section 9D only deal with the income of controlled foreign entities and that the anti-avoidance provisions relating to donations, settlements or other dispositions be included in Section 7, which deals with similar anti-avoidance issues (Republic of South Africa 2000). (1.6)For the purposes of this section and paragraph 110(1)(d.1), a taxpayer is deemed not to have disposed of a share acquired under circumstances to which subsection (1.1) applied solely because of subsection 128.1(4). (3)If a particular qualifying person has agreed to sell or issue securities of the particular person, or of a qualifying person with which it does not deal at arms length, to an employee of the particular person or of a qualifying person with which it does not deal at arms length, (a)except as provided by this section, the employee is deemed to have neither received nor enjoyed any benefit under or because of the agreement; and. [Links], Meyerowitz, D. & Spiro, E., 1995, Meyerowitz and Spiro on income tax, The Taxpayer, Cape Town. (iv)a mutual fund trust to which the particular person has transferred property in circumstances to which subsection 132.2(1) applied, (v)a qualifying person with which the corporation referred to in subparagraph (iii) does not deal at arms length immediately after the disposition, or, (vi)if the disposition is before 2013 and the old securities were equity in a SIFT wind-up entity that was at the time of the disposition a mutual fund trust, a SIFT wind-up corporation in respect of the SIFT wind-up entity, to acquire securities of the designated person or a qualifying person with which the designated person does not deal at arms length (which rights and securities are referred to in this subsection as the new option and the new securities, respectively), and, (i)the total value of the new securities immediately after the disposition, (ii)the total amount payable by the taxpayer to acquire the new securities under the new option, does not exceed the amount, if any, by which, (iii)the total value of the old securities immediately before the disposition. 4.3 Fund's obligation to withhold employees' tax A CCPC has agreed to sell or issue shares to an employee; and. John Doe enters into an agreement with his employer, Acme Inc., a CCPC, where he agrees to purchase 100,000 common shares for $100. [Links], Republic of South Africa, 1992, Income Tax Act 141 of 1992, Government Printer, Pretoria. Dividend Stripping and Section 94(7) of Income Tax Act - Learn by Quicko Once again this leads the authors of this article to believe that a taxpayer is entitled to income exemptions in the subsections of Section 7 where the wording does not specifically disregard exemptions as in Section 7(7). (q) "Non-resident person" means any person save the resident person. Clegg and Stretch (2015) state that 'income' in the context of Section 7(8) should be interpreted as 'income' as defined in the Act. Mr. Mohit is working as a guest lecturer in Indian University and earns consulting income of Rs. [Links], Correspondence: Danielle van Wyk dvanwyk@sun.ac.za, Received: 10 Mar. If the term 'income' in the context of Section 7(3) is indeed interpreted in line with the view of De Koker and Williams (2015), namely as 'gross income' less related deductible expenses and losses, the question arises as to whether exempt income is simply ignored? "adjusted gross income" means adjusted gross income as defined in Section 62 of the Internal Revenue Code, as that section may be amended or renumbered; (c)the total value of the new securities immediately after the disposition or exchange does not exceed the total value of the old securities immediately before the disposition or exchange. 27Q, on or before 31% . 50,000 per month. 26Q or Form No. The objective of the study is to understand whether the term 'income', as used in Sections 7(2) to 7(8) of the Act, is used in its defined sense, namely the amount remaining of the 'gross income' after the deduction of allowable exemptions, or if it should be ascribed a different meaning. This is deduced from the wording in the last sentence of Section 7(7), which includes otherwise exempt income in the 'income' that the taxpayer is deemed to have received. In terms of this section, in certain circumstances, 'income' is deemed to be income received by or accrued to a taxpayer. Section 7(2) was amended numerous times to clarify which persons and what income are covered by its provisions. qualifying personmeans a corporation or a mutual fund trust.(personne admissible), (a)if the person is a corporation, a share of the capital stock of the corporation; and, (b)if the person is a mutual fund trust, a unit of the trust.(titre), (8) to (15)[Repealed, 2010, c. 25, s. 3], Marginal note:Prescribed form for deferral. Trusts to be subject to further anti-avoidance provisions: The proposed What alternatives are Imposition of income tax PART II INCOME TAX BASE Division I: Chargeable income 2. Your average tax rate is 25.2% and your marginal tax rate is 41.0%. [5] The amount of the deduction has varied over time to be consistent with the variation in inclusion rates for capital gains. Section 7(11) provides that although the amount is received by the non-member, it will be deemed to be income in the hands of the member. Therefore, the authors of this article do not agree with such an interpretation and are of the opinion that the meaning of 'income' in this subsection is intended to be 'income' as defined in Section 1 of the Act. Marginal note:Order of disposition of securities. Davis et al. Meyerowitz and Spiro (1995) agree with the view of the Simpson case, namely that 'income' in Section 7(2) refers to profits or gains, after deducting expenditure. Such an interpretation, however, does not make sense to the authors of this article in the light of the fact that the legislature subsequently felt the need to add Section 7(2B) to specifically deal with the deduction of expenditure. The Income Tax Department NEVER asks for your PIN numbers, passwords or similar access information for credit cards, banks or other financial accounts through e-mail. They further state that income tax is, in principle, a creature of statute, and the principles of interpretation which apply to statutes, also apply to the interpretation of tax statutes. (i) the annual accretion in the previous year to the balance at the credit of an employee participating in a recognised provident fund, to the extent provided in rule 6 of Part A of the Fourth Schedule; (ii) the transferred balance in a recognised provident fund, to the extent provided in sub-rule (4) of rule 11 of Part A of the Fourth Schedule; (iii) the contribution made, by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD. These interpretations include 'taxable income', 'gross income' less related expenses and losses and 'gross income', while the authors of this article believe that it should be interpreted as 'income' as defined in Section 1 of the Act, as nothing indicates the contrary with reference to the interpretations discussed under Section 7(3). On 2 March 2021, the South African Revenue Service (SARS) published Interpretation Note 114 (IN) to clarify the interaction and application of sections 7(8) and 25B(1) to provide taxpayers with guidance on how to correctly apply the aforementioned provisions. The literal (ordinary) meaning of the term 'income'. (g)where the exchanged securities were issued under an agreement, the new securities are deemed to have been issued under that agreement. This website uses cookies to enhance the browsing experience. (e)the new securities are deemed to be the same securities as, and a continuation of, the exchanged securities, except for the purpose of determining if the new securities are identical to any other securities, (f)the qualifying person that issued the new securities is deemed to be the same person as, and a continuation of, the qualifying person that issued the exchanged securities, and. He worked as Director, in the M&A Tax Division at KPMG in India. RSC 1985, c 1 (5th Supp) | Income Tax Act | CanLII [Links], Republic of South Africa, 2005b, Explanatory Memorandum on the Revenue Laws Amendment Bill 2005, Government Printer, Pretoria. (c)the Canadian-controlled private corporation that is the employer of the employee. 58 of 1962 (Act) provides for a special set of beneficial rules applicable to farmers in South 9 - Basic Rules . Section 7 of the Income Tax Act[1] taxes an employees benefit derived from the exercise of rights under a legally binding agreement with an employer to sell or issue shares to the employee. SARS states in the IN that the words subject to the provisions of section 7 can be read to have the effect that if there is a conflict, inconsistency, or incompatibility between section 25B(1) and section 7(8), section 7(8) is given dominance and must prevail. (2015) and De Koker and Williams (2015) are of the opinion that 'income' in this context should be interpreted as 'income' as defined. Examples given in the 1914 definition included, inter alia, profit, gains, rents, interest and salaries, which seem to refer to gross amounts (in other words, before exemptions and deductions). Get insight into recent legal developments. 's 'taxable income'. At a glance. The benefit is equal to the difference between the option price and the fair market value of the shares when they are acquired. A critical analysis of the meaning of the term 'income' in Sections 7 (4)For greater certainty it is hereby declared that, where a person to whom any provision of subsection 7(1) would otherwise apply has ceased to be an employee before all things have happened that would make that provision applicable, subsection 7(1) shall continue to apply as though the person were still an employee and as though the employment were still in existence. Income which accrues or arises outside India, shall not be deemed to be received in India, merely because it is taken into account in a balance sheet prepared in India (Explanation 1 to section 5). Half the capital gain ($1,499,975) is included in income. A qualifying person (a corporation or mutual fund trust) has agreed to sell or issue a security under an agreement such that a benefit arises under subsection 7(1); The security was acquired under an agreement by the taxpayer; If the security is a share, it must be a prescribed share at the time of its issue or sale; The amount payable to acquire the security under the agreement must not be less than the fair market value at the time the agreement grating the option was made (minus any amount paid for the right to acquire the security).
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