8 October 2011

STT exemption may have wider application that originally thought

If your corporate restructuring does not qualify for tax roll-over relief in terms of section 42 to 47 of the Income Tax Act No 58 of 1962 (the Act) it does not necessarily mean that you will not qualify for the securities transfer tax (STT) exemption in section 8(1)(a) of the Securities Transfer Tax Act No 25 of 2007 (the STT Act).

For instance, section 8(1)(a)(i) of the STT Act provides that STT shall not be payable on the transfer of a security in terms of an "asset-for-share transaction" referred to in section 42 of the Act. Similar provisions exist for amalgamation, intra-group, unbundling and liquidation distribution transactions. In addition, section 8(1)(a)(vi) of the STT Act provides that STT shall not be payable:

"(vi) in terms of any transaction which would have constituted a transaction or distribution referred to:

(A) ……………..

(B) in subparagraph (i) or (ii) regardless of the market value of the asset disposed of in exchange for that security; or

(C) in subparagraphs (i) to (v) regardless of whether or not that person acquired that security as a capital asset or as trading stock, where the public officer of the relevant company has made a sworn affidavit or solemn declaration that the acquisition of that security complies with the provisions of this paragraph;"

The interpretation of section 8(1)(a)(i) to (vi) of the STT Act has always been subject to much debate. One of the issues has been whether the sworn affidavit or solemn declaration required by the public officer is only applicable where a taxpayer relies on the exemption under section 8(1)(a)(vi) of the STT Act or any exemption under section 8(1)(a) of the STT Act (ie whenever the taxpayer relies on one of the group relief provisions). In our view, it is prudent to complete the affidavit or solemn declaration whenever one relies on any of the exemptions in section 8(1)(a) of the STT Act.

A further contentious issue is whether a taxpayer is required to qualify for the roll-over relief in terms of the relevant group relief provisions before it is entitled to the STT exemption. In other words, does section 8(1)(a)(vi) of the STT Act, which provides for an exemption for a transaction which "would have" constituted a transaction contemplated in section 42 to 47 of the Act regardless of the factors contemplated in section 8(1)(a)(vi) of the STT Act, give the STT exemption a wider application? Or may one confine oneself to an analysis of the definition of the relevant transaction in sections 42 to 47 of the Act to establish whether the transaction is exempt from STT?

This issue may have been addressed to some extent in Binding Private Ruling 101 (4 May 2011) (BPR 101). In BPR 101 a foreign resident company (Foreign Co) sold its shares in a South African resident company (SACo 1) to another South African resident company (SACo 2) in exchange for shares in SACo 2 (the Transaction). It is likely that the Transaction did not qualify for the relief in terms of section 42 of the Act as the disposal of the SACo 1 shares by Foreign Co would not be taken into account for purposes of determining its taxable income (see section 42(8A)(b) of the Act). Despite the Transaction not qualifying for section 42 relief, it was held that the Transaction will qualify for an exemption under section 8(1)(a)(vi) of the STT Act, notwithstanding the fact that Foreign Co is resident of a foreign country.

Despite this positive ruling for the taxpayer, BPR 101 is not entirely clear as to why the taxpayer should be entitled to the exemption under section 8(1)(a)(vi) and not section 8(1)(a)(i) of the Act where the securities are transferred in terms of an asset-for-share transaction "referred to" in section 42. BPR 101 does not specify whether the market value of the SACo 1 shares being less than their cost or the SACo 1 shares being acquired as a capital asset or trading stock meant the Transaction did not constitute an "asset-for-share transaction" as defined in section 42 of the Act. Presumably, the Transaction in BPR 101 constituted an "asset-for-share transaction" as defined in section 42 of the Act, however, section 42(8A)(b) of the Act prevented the parties from relying on the roll-over relief. If this is the case, the ruling seems to suggest that if one enters into an "asset-for-share transaction" as "referred to" or as defined in section 42 of the Act one should be entitled to the STT exemption in section 8(1)(a) of the STT Act. On this basis the taxpayer may have been entitled to the exemption in terms of section 8(1)(a)(i) of the STT Act and not section 8(1)(a)(vi) of the STT Act.

If this interpretation is correct, taxpayers may confine their analysis to the definition of the relevant transaction in sections 42 to 47 of the Act to establish whether the transaction is exempt from STT. It is notable that the definition of an "amalgamation transaction" in section 44 of the Act may have a wider application than the other definitions in section 42, 45, 46 and 47 of the Act. The "amalgamation transaction" definition does not contain the specific limitations to the application of group relief provisions. These limitations are contained in the subsequent subparagraphs of the section 44. For instance, one may enter into an "amalgamation transaction" as defined in section 44 of the Act even if the assets (including shares) are disposed of by an amalgamated company in exchange for a consideration other than equity shares in the resultant company. In such instance, the amalgamated company will not receive any (or a proportionate) tax roll-over relief but may be entitled to rely on the STT exemption in terms of section 8(1)(a)(ii) of the STT Act.

Accordingly, if this interpretation is correct, it is submitted that there may be a number of amalgamation transactions that do not qualify for the income tax and capital gains tax relief but qualify for the STT exemption. It is unfortunate that the ruling did not expand on the reasons why the exemption in section 8(1)(a)(vi) was applicable to the Transaction.

Nevertheless, BPR 101 emphasises that taxpayers should not automatically assume that an STT exemption is not available where the transaction does not satisfy the relevant group relief provisions in the Act.

Andrew Lewis

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