SARS adopts a very lenient approach when dividends are recharacterised as income pursuant to the issuing of preference shares

One of the key features of section 8E is that a preference share will be deemed to be a so-called hybrid equity instrument to the extent that the issuer of the preference share is obliged to redeem the preference share within three years from the date of issue.

The date of issue of a share is not only confined to the actual date upon which the share is issued by the company, but it includes the date on which:

• the company that issued the share undertakes the obligation to redeem the share in whole or in part; or
• the holder of the share, at any time after the share has been issued, obtains the right to require that that share been redeemed in whole or in part, other than as a result of its acquisition by the holder thereof.

The effect of this definition is that a date of issue can also arise to the extent that there is subsequently an undertaking by the issuer of the preference share to redeem the preference share within a period of three years.

Apart from the fact that SARS has indicated that additions or changes to the redemption features of a share will not automatically result in it becoming a hybrid equity instrument, a general approach has also been taken that any redemption after the expiry of a period of three years from the original date of issue of a preference share will not result in the share becoming a hybrid equity instrument.

To the extent that the original redemption date of a preference share thus falls outside the three-year period, it is indicated in the interpretation note that no new date of issue will arise to the extent that the redemption date is extended. This is irrespective of the fact that the extended redemption date may fall within a three-year period after the date upon which it was decided to extend the original redemption date. The only instance where one would be dealing with a restricted equity instrument is if the original redemption date is amended to fall within the original three-year period from the date that the preference share was originally issued. It appears that one would also not deal with a recharacterisation to the extent that there is an extension of the original redemption date even before the original three-year period has expired. The test seems to be that, to the extent that the preference shares are redeemed after expiry of a period of three years from their original date of issue, one would not be dealing with a hybrid equity instrument and the dividends would not be recharacterised.

It is not that clear what the position would be to the extent that the issuer of the preference shares defaults and an early redemption date arises in circumstances where this early redemption date still falls outside the initial three-year period. For instance, the preference shares could have been issued for an original period of five years and the default arises in year four. In these circumstances it appears that there will still not be a new date of issue given the fact that the preference shares have already been held for a period of three years.

SARS’ views are welcomed as they bring clarity to a much debated topic. One of the arguments was always that, to the extent that the redemption date is amended, it brings about a new date of issue given the fact that the original date of issue has changed. In other words, there is a new right that arises given the fact that the new right relates to a different redemption date as opposed to the original stipulated redemption date. This argument was based on the fact that the date of issue refers to the undertaking of the issuer to redeem the preference share and any extension will result in a new undertaking on the part of the issuer to redeem the preference share.