|DATE:||1 FEBRUARY 2002|
|ACT:||INCOME TAX ACT, 1962 (the Act)|
|SUBJECT:||FOREIGN DIVIDENDS - DEDUCTIBILITY OF INTEREST|
Foreign dividends which were received by or accrued to on or after 23 February 2000, or which accrued before 23 February 2000, but were received on or after this date, are subject to income tax in the hands of all residents. Interest incurred in purchasing shares in respect of which the dividends accrue would normally not qualify for deduction in terms of section 11(a) and 23(g) of the Act. Section 9E(5A) of the Act, however, provides for a special deduction in order to alleviate the problem.
The purpose of this Note is to provide guidance regarding a resident who is a natural person and a portfolio investor in relation to the deduction of interest expenditure. A portfolio investor is any person that holds less than ten per cent of the equity share capital of a company.
This section overrides the "trade" requirement to a certain degree in that it allows a resident to deduct interest actually incurred in the production of income derived from both exempt and taxable foreign dividends.
In terms of section 9E(5A)(a) of the Act a resident will be allowed a deduction from taxable foreign dividends derived during any year of assessment, any interest actually incurred in the production of foreign dividends as defined in section 9E. This will apply notwithstanding the provisions of sections 11(a) and 23(g) of the Act, but subject to certain limitations and conditions.
Income derived from foreign dividends is equal to the amount of gross foreign dividends less the amount of foreign dividends exempt from tax in terms of the provisions of sections 10(1)(i)(xv) and 10(1)(k)(i).
|2.2||Foreign dividends, (i.e. taxable foreign dividends and foreign dividends exempt from tax in terms of section 9E(7)) are included in "gross income" in terms of paragraph (k) of the definition of "gross income".|
|2.3||Foreign dividends which are taxable in terms of section 9E are excluded from the exemption for dividends in terms of section 10(1)(k)(i).|
A natural person is entitled to a basic exemption in respect of interest and foreign dividend income which would otherwise not be exempt from tax. The exemption must first be applied to taxable foreign dividends and then to any other interest income and taxable dividends (other than taxable foreign dividends). [Section 10(1)(i)(xv)]
For the 2001 year of assessment the basic exemption amounts to R3 000 for natural persons under 65 years of age and R4 000 for natural persons who are 65 years of age or older.
In respect of the 2002 year of assessment the basic exemption amounts to R4 000 for natural persons under 65 years of age and R5 000 for natural persons who are 65 years of age or older.
The following exemptions provided for in section 9E(7) are of particular importance to a resident that is a natural person and a portfolio investor:
Example 1: 2001 year of assessment
Ms A is ordinarily resident in South Africa, 50 years of age and unmarried. She elected to be taxed on the net amount of her foreign dividends i.e. the amount of the dividend received by her after the deduction of foreign withholding taxes.
Calculation of the amount of interest deductible in terms of section 9E(5A)(a):
Calculation of taxable income derived from foreign dividends
Refer to the spreadsheet attached. The purpose of this example is to illustrate how the amount of excess interest must be carried forward on an annual basis.
Example 2: Calculations of taxable foreign dividends for individuals:
|Year of assessment||Ref||2001||2002||2003||2004|
|Gross foreign dividends (Para (k) of the definition of gross income)||16000||11000||17000||30000|
|Less: Exempt foreign dividends(s 9E(7))||A||6000||1000||2000||Nil|
|Less: Basic exemption||B||3000||4000||4000||4000|
|Income derived from foreign dividends||C||7000||6000||11000||26000|
|Less: Deductible interest||7000||6000||11000||15000|
|Calculation of deductible interest:|
|Interest incurred during the year (s 9E(5A))||20000||8000||15000||15000|
|Plus: Excess interest carried forward from previous year||Nil||4000||1000||Nil|
|Limited to income derived from foreign dividends (C)||7000||6000||11000||26000|
|Taxable income derived from foreign dividends||Nil||Nil||Nil||11000|
|Excess interest (D - C)||13000||6000||5000||Nil|
|Less: Exempt foreign dividends (A + B)||9000||5000||6000||4000|
|Balance carried forward||4000||1000||Nil||Nil|