On 24 December 2024 the Taxation Laws Amendment Act 42 of 2024 was promulgated. It contained three amendments to s 6quat (the rebate for foreign taxes). Two of these affected limitations on the rebate pertaining to foreign capital gains, while the third dealt with an amendment to the rule for translating foreign taxes of a controlled foreign company (CFC) to rand.
Amendments to s 6quat affecting capital gains
In determining the
quantum of the s 6quat rebate on capital gains, there is a three-step limitation process:
- Step 1 — The comparative inclusion limitation (s 6quat(1) and (1A)).
- Step 2 — Foreign tax limitation on foreign taxable capital gains (para (iB) of the proviso to s 6quat(1B)(a)).
- Step 3 — The overall normal tax on taxable income limitation (section 6quat(1B)(a)).
The first two amendments affect steps 1 and 2 respectively of the limitation process.
Amendment of the CGT inclusion rate for purposes of determining qualifying foreign taxes
Paragraph (ii) of the proviso to s 6quat(1A) was amended to insert subparagraph (bb):
'Provided that—
(ii)
for the purposes of this subsection, the amount so included in such resident's taxable income must be determined—
(bb)
by replacing the percentages in paragraph 10 (1) (a), (b) (i), (iii) and (iv), and (c) of the Eighth Schedule by 100 per cent.'
The amendment came into operation on 1 January 2025 and applies in respect of years of assessment commencing on or after that date.
Paragraph 10(1) of the Eighth Schedule sets out the various inclusion rates which must be multiplied by a net capital gain to arrive at a taxable capital gain. The net capital gain is the sum of capital gains and losses reduced by the annual exclusion (aggregate capital gain) reduced by an assessed capital loss brought forward from the previous year of assessment.
Paragraph 10(1)(a) specifies a 40% inclusion rate for individuals and special trusts, para 10(1)(b) specifies the inclusion rate for four of the five funds of an insurer ((i) individual policyholder fund: 40%, (ii) untaxed policyholder fund: 0%, (iii) company policyholder fund: 80% and (iv) risk policy fund: 80%), while para 10(1)(c) applies an inclusion rate of 80% 'in any other case', which would include a company, the corporate fund of a long-term insurer and a trust. Paragraph (ii)(bb) of the proviso does not mention the untaxed policyholder fund because it is not liable to CGT and so has no need for the s 6quat rebate.
Section 6quat(1A) sets out the foreign taxes that potentially qualify for rebate purposes.
These foreign taxes must relate to the foreign-source amounts listed in s 6quat(1) that are included in taxable income. Foreign taxes will not qualify for rebate purposes if they relate to amounts that do not constitute
- income; or
- a taxable capital gain.
To grant a rebate on taxes attributable to exempt income would amount to subsidising another country's tax system. A typical example would be a resident employee who works in a foreign country and earned R3 million for the 2025 year of assessment on which foreign tax of R600 000 was paid. The employee qualified for the s 10(1)(o)(ii) exemption on the first R1,25 million of the remuneration. Consequently, R1,75 million / R3 million × R600 000 = R350 000 would comprise the qualifying foreign taxes under s 6quat(1A). The balance of R250 000 relating to the exempt income of R1,25 million will be permanently forfeited and play no further part in the s 6quat computation process, that is, it will not be carried forward to the following year of assessment.
When it comes to applying this methodology to a capital gain, it is necessary to compare the South African taxable capital gain with the taxable capital gain computed by the foreign country. The two gains might differ for several reasons. For example, some countries have a periodic rebasing which results in the base cost of the asset being increased. The annual exclusion in the foreign country might also differ substantially from South Africa's annual exclusion of R40 000. For example, the annual exclusion in the United Kingdom for 2024/2025 is £3 000, about R69 000.
When the taxable capital gain determined in the foreign country is lower than the South African taxable capital gain, there will be no limitation. But when it is higher, the limitation will apply.
One of the main reasons for a lower South African taxable capital gain is South Africa's inclusion rate. Before the amendment to the proviso, the inclusion rate had the effect of potentially disallowing a large portion of the foreign tax on a foreign taxable gain, even though the foreign tax may have approximated the South African CGT. This problem has now been resolved by assuming a 100% inclusion rate for the purposes of determining whether the foreign taxes relate to amounts included in taxable income.
Example — Applying the comparative inclusion in taxable income limitation to a taxable capital gain
Facts:
Jane derived a capital gain of R1 million from the sale of immovable property in Country X. Country X allows an annual exclusion of R70 000 and applies a full inclusion rate of 100% to the net capital gain. It then applies a flat CGT rate of 18% to the taxable capital gain. Jane is on the maximum marginal rate and has no other capital gains for the year of assessment.
Result
Before the 2024 amendment:
Jane's taxable capital gain is R1 million − R40 000 annual exclusion = R960 000 × 40% inclusion rate = R384 000. The taxable capital gain under the tax law of Country X is R1 million − R70 000 annual exclusion = R930 000. The foreign tax payable is R930 000 × 18% = R167 400.
Therefore, the qualifying foreign tax under s 6quat(1A) potentially qualifying for rebate purposes is R384 000 / R930 000 × R167 400 = R69 120. The balance of R167 400 − R69 120 = R98 280 is permanently forfeited.
After the 2024 amendment:
For the purposes of s 6quat(1A) the taxable capital gain is R960 000 assuming a 100% inclusion rate. Since this figure exceeds the taxable capital gain determined under the tax law of Country X of R930 000, the full tax of R167 400 will potentially qualify for rebate purposes.
Amendment of the foreign tax limitation on foreign taxable capital gains
Section 6quat(1B) limits the foreign taxes on the foreign taxable income referred to in s 6quat(1) to the attributable South African normal tax (step 3). Any foreign taxes limited under step 3 are carried forward to the following year of assessment.
However, the proviso to s 6quat(1B) contains exceptions which prevent mixing of two types of foreign taxable income with other foreign taxable income. The first is so called diversionary net income of a CFC in s 9D(9A) (proviso (iA)) and the other, with which we are here concerned, relates to a foreign taxable capital gain (proviso (iB)).
Before its amendment, proviso (iB) provided as follows:
'(iB)
the taxes contemplated in subsection (1A)(a)(iii) which are attributable to any taxable capital gain in respect of an asset which is not attributable to a permanent establishment of the resident outside the Republic, must in aggregate be limited to the amount of normal tax which is attributable to that taxable capital gain;'
This limitation can be reduced to a formula:
Foreign-source taxable capital gain not attributable to a permanent establishment outside South Africa / Taxable income from all sources × Normal tax payable
A foreign-source taxable capital gain attributable to a permanent establishment outside South Africa was not subject to this limitation and was subject only to the overall limitation in step 3. Thus, foreign taxes on a taxable capital gain attributable to a foreign permanent establishment which were limited under step 3 could be carried forward to the following year of assessment. By contrast, foreign taxes on taxable capital gains not attributable to a permanent establishment were limited under step 2 and any excess was permanently forfeited.
After its amendment, proviso (iB) provides as follows:
'(iB)
the taxes contemplated in subsection (1A)(a)(iii) that are attributable to any taxable capital gain must in aggregate be limited to the amount of normal tax that is attributable to that taxable capital gain;'
The amendment came into operation on 1 January 2025 and applies in respect of years of assessment commencing on or after that date.
The revised wording produces the following formula:
Foreign-source taxable capital gain / Taxable income from all sources × Normal tax payable
The first effect of the amendment is to now treat a taxable capital gain attributable to a permanent establishment in the same way as any other foreign-source capital gain. Any foreign tax exceeding the attributable South African normal tax will be permanently forfeited instead of being carried forward to the next year of assessment.
The second effect, it is submitted, is that the limitation formula will have to be applied by SARS on an aggregate basis rather than on an asset-by-asset basis as is currently the practice as set out in Interpretation Note 18 (IN 18). IN 18 (Issue 5) dated 9 December 2022 states the following:
'A limitation calculation is performed for each foreign capital gain when more than one foreign capital gain is subject to paragraph (iB) of the proviso to section 6quat(1B)(a). No provision is made for the aggregation of foreign capital gains in applying paragraph (iB) of the proviso.'
The SARS view seems to be based on the phrase 'in respect of
an asset', which is framed in the singular. Whatever one may think of the correctness of this interpretation, it surely cannot be sustained based on the revised wording, which no longer refers to 'an asset'. The limitation should be applied on an aggregate basis by determining a taxable capital gain for all foreign-source capital gains.
The question of how capital losses should be allocated in determining a foreign-source taxable capital gain is an issue not dealt with explicitly in s 6quat. It will be interesting to see whether SARS will attempt to lay down fixed rules or whether taxpayers will be given carte blanche to adopt the most favourable allocation method. The problem with laying down fixed rules in this instance is that it may lead to complexity and be open to challenge.
Aligning the s 6quat rebate and translation of net income rule for CFCs
Before its amendment, s 6quat(4) provided that the qualifying foreign taxes must be translated to rand using the average exchange rate for the year of assessment determined at the end of the year of assessment.
This rule proved inconsistent in relation to CFCs. Section 9D(6) requires the net income of a CFC to be translated to rand using the average exchange rate for the foreign tax year of the CFC, which might differ from the year of assessment of the resident to whom the net income is imputed.
Section 6quat(4) has been amended to have a separate translation rule for CFCs in s 6quat(4)(b) which requires the translation of the foreign taxes to be at the average exchange rate for the foreign tax year of the CFC.
The amendment came into operation on 31 December 2024 and applies in respect of foreign tax years of CFCs ending on or after that date.
This article was first published by ASA in its
March 2025 issue.
