Third‐party backed share anti‐avoidance rules deem dividend yields of preference shares, backed by third parties through an enforcement right of the holder, to be income except where the funds derived from the issue of these third‐party backed shares are used for a qualifying purpose.
The anti‐avoidance rules do not apply if the funds derived from the issue of the preference shares in question are used for a qualifying purpose, for example, if the funds are used directly or indirectly to acquire equity shares in an operating company. It has come to governments attention that the following amendments are required to clarify the rules.
Extending the definition of enforcement right to a connected person
An enforcement right, as defined in the Income Tax Act, encompasses a right of the holder of a share, or any connected person in relation to that holder (a third party), to enforce performance by another person in respect of that share. However, the definition of a third‐party backed share in section 8EA of the Income Tax Act does not clearly match the intent that either a holder or a connected person to that holder could hold that enforcement right. Government proposes that the definition of a third‐party backed share be clarified to address this anomaly.
Extending exclusions to the ownership requirement
In 2023, amendments were made to the qualifying purpose provisions to clarify the ownership requirement for the equity shares in the operating company by the person that acquired those equity shares at the time of the receipt or accrual of any dividend or foreign dividend, subject to certain exclusions. The exclusions include a provision that the ownership requirement will not apply if that equity share was a listed share and was substituted for another listed share in terms of an arrangement that is announced and released as a corporate action on a South African regulated stock exchange. It is proposed that the ownership requirement exclusions be extended to include corporate actions relating to listed share substitutions on a recognised exchange in a country other than South Africa.
In addition, the ownership requirement exclusions will apply if the equity shares in the operating company are disposed of and the funds derived from that disposal are used to redeem the preference share within 90 days of the disposal. It has come to governments attention that further clarity is required on whether settlement of any dividends, foreign dividends or interest accrued from that preference share that are payable also falls within the ambit of its allowable redemption. It is proposed that the legislation be amended to include the settlement of any amounts of dividends, foreign dividends or interest accrued in respect of the redemption of a preference share.