1. INTRODUCTION
In drawing up standards for clearance and settlement procedures an international working committee found that the settlement status in South African equity markets differed from the settlement status adopted by most countries internationally. The committee recommended that securities lending be encouraged as a method of expediting the settlement of security transactions. Securities lending also improves liquidity, encourages investment and increases pricing efficiency.
Consequently, in 1996 certain amendments were effected to the Stamp Duties Act, No 77 of 1968 (the SD Act) and Income Tax Act, No 58 of 1962 (the IT Act), to introduce the concept of a lending arrangement. The amendments to the IT Act are based on the principles contained in the tax systems of various other countries, such as Australia, Canada, Japan, the United Kingdom and the United States. According to those tax systems the lender of the loaned securities is deemed still to be the owner thereof and no gain or loss arises in the hands of the lender or borrower as a result of the transfer of the loaned securities between the lender and borrower. Payments made in respect of such securities will, however, have certain tax implications.
The provisions of this Practice Note are applicable to residents and non-residents who are subject to the taxes imposed in terms of the various Acts addressed in this Practice Note.
Section 23 (1) of the SD Act defines a "lending arrangement" as-:
"any arrangement or agreement in terms of which-
Securities lending arrangements also normally provide that the borrower shall pay to the lender a "manufactured dividend" in lieu of any dividends declared in respect of the security borrowed from the lender. The "manufactured dividend" may include adjustments for the effects of Income Tax or Secondary Tax on Companies (STC). Any payment made by the borrower to the lender as a "manufactured dividend" is not a dividend for Income Tax purposes and must not be treated as a dividend by either the lender or the borrower. The "manufactured dividend" will constitute gross income in the hands of the lender and will not qualify for the exemption in terms of section 10(1)(k). The person who is responsible for the payment of a "manufactured dividend" will only be allowed a deduction in the determination of his taxable income of the amount paid, if the amount meets the requirements of section 11(a) of the IT Act.
3.3. Secondary Tax on Companies
The lender may not reduce the amount on which its liability for STC is calculated by the "manufactured dividend" received. The borrower will, therefore, not be liable for the payment of STC on the "manufactured dividend" paid to the lender.
Section 22(9) of the IT Act deems the marketable security, which has been loaned by the lender and has not been returned by the borrower at year-end, to remain closing stock in the hands of the lender. Such marketable security is also excluded from the closing stock of the borrower if he or she is in possession of such a marketable security at his or her year-end.
A "manufactured dividend" in respect of a "lending arrangement" does not constitute "interest" or "rental" as defined in the Tax on Retirement Funds Act.
5. VALUE-ADDED TAX
As regards scrip lending, the following provisions of section 2 are applicable:
"Financial services. - (1). For the purpose of this Act, the following activities shall be deemed to be financial services:
(a) ...
(b) ...
(c) issue, allotment, drawing, acceptance, endorsement or transfer of ownership of a debt security;
(d) issue, allotment or transfer of ownership of an equity security;
(e) ...
(f) the provision by any person of credit under an agreement by which money or money's worth is provided by that person to any other person who agrees to pay in the future a sum or sums exceeding in aggregate the amount of such money or money's worth;
If a single amount is payable to a lender and such amount constitutes both a fee or commission and a "manufactured dividend" or "manufactured interest", it is essential that, for purposes of section 10(22) of the VAT Act, the amounts attributable to the fee or commission and that attributable to the "manufactured dividend" or "manufactured interest" be indicated at the time the agreement is entered into. Failing a split into the separate elements, the full amount will be subject to VAT.
The UST Act will come into operation on a date to be determined by the President by proclamation in the Gazette. The purpose of imposing this tax is to provide for the dematerialisation of securities listed on the JSE in a Central Securities Depository (CSD).
In terms thereof all share certificates which are deposited in the CSD will be cancelled and shareholding will be represented by entries in the accounts maintained by participants who act on behalf of the shareholders. From a tax point of view it was necessary to introduce a duty on the transfer of uncertificated securities, as the issue of securities and the transfer of beneficial and legal ownership thereof will occur without the filing of any paper.
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