The draft Taxation Laws Amendment Bill, 2012 has proposed an amendment to the definition of a 'share'.
Heinrich Louw, an Associate in the Tax Practice at Cliffe Dekker Hofmeyr notes that according to SARS, the reason for the proposed change is twofold. Firstly, the previous definition is circular and self-referential in that it refers to a 'share'. Secondly, the previous definition technically includes non-profit entities, which in economic terms makes no sense.
Louw explains that with effect from 1 January 2013 a share will be defined as follows:
"'share' means, in relation to any company contemplated in paragraph (a), (b), (e) or (f) of the definition of 'company', any unit into which the proprietary interest in that company is divided;"
“The reference to paragraphs (a), (b), (e) and (f) of the definition of 'company' means that locally incorporated companies, foreign incorporated companies, foreign portfolios of collective investment schemes in participation bonds, securities or property, and close corporations are included. It also means that co-operatives and local associations formed to benefit the public are excluded,” Louw says.
According to SARS, this definition is also more aligned with the Companies Act, No 71 of 2008.
Louw notes that it is also proposed that the definition of 'equity share' be amended. Currently an equity share is defined as "any share in a company, excluding any share that neither as respects dividends nor as respects returns of capital, carries any right to participate beyond a specified amount in a distribution".
The new definition is to read as follows:
"'equity share' means any share in a company unless:
- the amount of any dividend or foreign dividend in respect of that share is based on or determined with reference to the time value of money;
- the issuer of that share is obliged to redeem is obliged to redeem that share in whole or in part; or
- that share may at the option of the holder be redeemed in whole or in part."
“SARS says that the reason for the amendment is that the current definition of equity share is not aligned with the Companies Act. SARS also says that the new definition will clearly link the definition of equity share to common commercial practices that separate ordinary shares from preference shares.
“The new definition also fits in with SARS's proposed amendments to the anti-avoidance provisions dealing with the re-characterisation of certain instruments as either debt or equity where attempts are made to disguise their true nature,” he adds.