Scope of capital gains tax liability broadened
In order to provide the necessary legislative amendments required to implement the tax proposals that were announced in the 2015 National Budget on 25 February 2015, the National Treasury published the Draft Taxation Laws Amendment Bill (TLAB), 2015, on 22 July 2015 for public comment.
One of the proposed amendments relates to the definition of 'immovable property' as provided in paragraph 2 of the Eighth Schedule to the Income Tax Act, No 58 of 1862 (Act).
By way of background, paragraph 2 of the Eighth Schedule distinguishes between residents and non-residents for purposes of determining a capital gains tax (CGT) liability. Insofar as residents are concerned, CGT applies to any capital gain derived from the disposal of any capital asset irrespective of where the asset is situated. As far as non-residents are concerned, the CGT liability will only be triggered if the assets are capital in nature and constitute:
- fixed (immovable) property in South Africa;
- any interest or right of whatever nature of that non-resident to or in immovable property situated in South Africa; or
- any asset which is attributable to a permanent establishment of that non-resident in South Africa.
Paragraph 2(2) of the Eighth Schedule defines an 'interest in immovable property' situated in South Africa as:
- equity shares held by a person in a company or a vested interest in the assets of a trust if more than 80% of the market value of those equity shares is attributable to immovable property situated in South Africa; and
- in the case of a company or other entity, that person directly or indirectly holds at least 20% of the equity shares in that company or ownership or right to ownership of that other entity.
According to paragraph 2 of Article 6 of the Organisation of Economic Cooperation and Development (OECD) Model Tax Treaty, the term immovable property is defined to include "the rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for working of, or the right to work, mineral deposits, sources and other natural resources."
Having regard to the above, it is clear that the current definition of 'immovable property' in paragraph 2(2) of the Eighth Schedule is not aligned with the definition of 'immovable property' in the OECD Model Tax Treaty in that the current definition does not include the right to mine, prospecting rights, and right to work mineral deposits and other natural resources. Given South Africa's vast treaty network, the Explanatory Memorandum to the Draft TLAB proposes that the definition of the term 'immovable property' in paragraph 2(2) of the Eighth Schedule be closely aligned to that provided in paragraph 2 of Article 6 of the OECD Model Tax Treaty, to include the right to variable payments or fixed payment as consideration for the working of or right to work mineral deposits, sources and other natural resources.
It is intended that the proposed amendment will avoid any possible anomalies and thereby create legal certainty with regard to what constitutes immovable property for non-residents. The proposed amendment will come into operation on 1 January 2016 and will apply in respect of years of assessment commencing on or after that date. Public comments on the proposed amendments are due by close of business on 24 August 2015.
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