The South African Revenue Service has recently released a number of advance tax rulings. We briefly summarise some of these rulings below.

Binding Class Ruling No. 24: Securities Lending Transactions – "Short Selling" of debt securities

The ruling dealt with the question whether the expenditure incurred to "close-out" a securities lending transaction, with debt securities as the subject matter of the lending transaction, is deductible.

The ruling was made subject to the conditions and assumptions that inter alia –

• An unconditional obligation to return the debt securities to the lender existed on the day the security lending transaction is entered into; and
• There will be no set-off of any payment due and payable in terms of the security lending transaction between the lender and the borrower.

A distinction was made between a lending transaction where the "close-out" dates were specified and unspecified. One should therefore consider the tax implications of the difference scenarios separately. However, the important principle which was confirmed by the ruling was that the obligation to return the debt securities may be recognised by the borrower in the year of assessment in which the securities lending transaction is concluded and in that year of assessment the obligation gives rise to an expense for purposes of section 11(a) read with section 23(g).

Binding Class Ruling No. 25: Tax implications of share option plan/share appreciation rights plan

The ruling dealt with the income tax implications for employees of a share option plan and a share appreciation rights plan (the Schemes) created by the holding company of their employer and the appropriate apportionment formula that must be used to determine the employees taxable income.

The uncertainty in the current instance was that the employees participating in the Schemes rendered services both within and outside the boundaries of South Africa (SA).

In other words, to what extent should South Africa be granted taxing rights in respect of the benefits enjoyed by the participants of the Schemes? The ruling makes the distinction between non-resident employees (who are subject to tax on SA sourced income) and resident employees (who are subject to tax on their worldwide income).

The ruling confirmed that non-resident participants would be subject to income tax in SA on SA sourced income which includes any gains under section 8A and 8C of the Income Tax Act No. 58 of 1962 (the Act). The portion of the gain is deemed to have accrued evenly over the period of the services rendered by the participant, which may be expressed by the following formula –

Total calendar days in South Africa Total calendar days between date of grant and date of exercise x Section 8A/C gain

A resident participant will be exempt from income tax to the extent the provisions of section 10(1)(o)(ii)(C) of the Act applies (i.e. inter alia employee is outside SA for a period exceeding 183 full days in aggregate during any 12 month period and a continuous period of 60 full days during that period). Similarly, the portion of the gain which will be exempt and spread evenly over the period during which the services were rendered may be expressed by the following formula –

Total calendar days outside South AfricaTotal calendar days between date of grant and date of exercise x Section 8A/C gain

The provisions of paragraph 11A of the Fourth Schedule to the Act, which requires the employer to withhold pay-as-you-earn in respect of the section 8A and 8C gains will be applicable.

Binding private ruling No 93: Deductibility of environmental expenditure following an asset-for-share transaction

The ruling dealt with the scenario where a company has an environmental obligation to undertake decommissioning, remediation or restoration in respect of some of its assets. In terms of section 37B(6) of the Act the company is allowed a deduction in respect of expenditure incurred in this regard provided the obligation arose from trade previously carried on by it.

However, the company (the transferor) is to dispose of the assets to a new company by way of an asset-for-share transaction in terms of section 42 of the Act. The question is whether the new company (the transferee) will also qualify for a section 37B(6) deduction even though the obligation in respect of the assets will not have arisen from trade previously carried on by it (the transferee).

The ruling makes it clear that the new company will qualify for the deduction as the two companies will be regarded as one and the same person for purposes of section 42(3)(a)(ii) of the Act. In other words, pursuant to the transactions, the new company (transferee) will "step into the shoes" of the transferor from an environmental legislation perspective and assume the obligations in relation to the decommissioning, remediation and restoration of the asset concerned, being allowance assets.

Written by Andrew Lewis, Associate
Heinrich Louw, Candidate Attorney, Tax Practice, Cliffe Dekker Hofmeyr