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A critical analysis of the application of section 31(3) of the Income Tax Act 58 of 1962 where the investor is an emigrant from South Africa

Dissertation by: Darron Garth West

Download full dissertation here: A_critical_analysis_of_the_application_o

Abstract

“Section 31(3) of the Income Tax Act 58 of 1962 (‘the Act’) is an area of the law that has not been explored by the South African courts. By way of a case study, this dissertation examined an application of the so-called ‘thin capitalisation’ rules embodied in section 31(3) where the non-resident lender is an emigrant from South Africa. Specifically, the following questions were addressed in the context of the case study:

  1. Was the South African Revenue Service (‘SARS’) justified in applying section 31(3) and if so, was its application thereof correct?
  2. Should the emigrant’s status as a South African resident at the time of granting financial assistance affect the application of section 31(3)?
  3. Could objections be raised to the application by SARS of section 31(3), and if so, on what basis?
  4. How might section 31(3) be applied prospectively on the facts of this case?

In respect of the first research question, but for three matters of principle, SARS appeared to have suitable justification to apply section 31(3) on the facts of the case. The three matters of principle raised were considered separately as grounds for objection to the application of section 31(3).

In respect of the second research question, both the literal and purposive interpretations of section 31(3)(a) seem to offer the taxpayer companies in this case study cogent grounds for objection. The evident ambiguity associated with the use of ‘is not a resident’ with ‘has granted financial assistance’ should result in the interpretation of the section contra fiscum.

Over and above the objection raised in the context of the second research question, the third research question considered further questions in respect of :

  1. whether or not the independence of the board of trustees interposed between the investor and the recipient could prevent the application of section 31(3); and
  2. the manner in which and extent to which the Commissioner had exercised his discretion in terms of section 31(3)….Read further.
2 March 2020
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