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06 April 2018
Section 42 of the Income Tax Act (58/1962) allows taxpayers to transfer assets to a company free of immediate tax consequences, provided that certain requirements are met (ie, there is a roll over for tax purposes). However, certain anti-avoidance provisions may be triggered if the company that acquired the assets disposes of them within 18 months of acquisition.
The question remains as to whether the anti-avoidance provisions applies if the company that acquired the assets disposes of them within 18 months of acquisition to another company as an asset-for-share transaction under Section 42 of the Income Tax Act.
The South African Revenue Service (SARS) provided some guidance on this matter in Binding Private Ruling (BPR) 288.
In BPR 288 the taxpayer sought a ruling from SARS on the following proposed transactions.
Company A is a local company. The shares in Company A are held as follows:
A new shareholder (X) bought 6.5% of the shares in Company A from Company B and the managing director, in proportion to their shareholding in Company A and at market price.
X transferred the shares it acquired in Company A to Company Q, a local company, in exchange for shares in Company Q.
Company B and the managing director then disposed of 19.5% of their shares in Company A to Company R in exchange for shares in Company R, in quantities proportionate to their respective shareholding in Company A. Company B transferred those shares as an asset-for-share transaction under Section 42 of the Income Tax Act. Company R intended to hold the shares in Company A on capital account.
The subsequent transaction was the complicated one: Company R promptly transferred its shares in Company A to Company Q in exchange for shares in Company Q. Company R transferred those shares as an asset-for-share transaction under Section 42 of the Income Tax Act. Company R then held 75% of the shares in Company Q. The remaining shares in Company Q were held by X.
SARS ruled as follows:
If a taxpayer transfers a capital asset to a company in exchange for shares in that company (meeting all of the Section 42 requirements) and if the company then promptly disposes of that capital asset to another company in exchange for shares in that company (meeting all of the Section 42 requirements), then both transactions may qualify for tax roll-over relief.
However, SARS clarified that BPR 288 was specific to the facts in the matter. Therefore, BPR 288 is not a licence for taxpayers to do successive asset-for-share transactions under Section 42 of the Income Tax Act in all cases. Taxpayers must seek specific advice from tax professionals before implementing such transactions.
For further information on this topic please contact Ben Strauss at Cliffe Dekker Hofmeyr by telephone (+27 21 481 6300) or email (firstname.lastname@example.org). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.
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