The South African Revenue Service (SARS) released Binding Private Ruling No 184 (Ruling) on 11 November 2014, which deals with a proposed asset-for-share transaction in terms of s42 of the Income Tax Act, No 58 of 1962 (Act).
The applicant was a resident family trust. The trust held all the issued shares in Company A and Company B.
It was proposed that the applicant dispose of its shares in Company A to Company B so that Company A could become a wholly-owned subsidiary of Company B. It was further proposed that, as consideration for the transfer of the shares in Company A to Company B, Company B would issue an additional equity share to the applicant.
The issue of the equity share to the trust would solely be to bring the proposed transaction within the ambit of s42 of the Act.
Despite the apparent artificiality of issuing an additional equity share to the applicant, which already held all the issued shares in Company B, SARS ruled that the proposed transaction would fall within s42 of the Act.
Section 24BA of the Act is an anti-avoidance provision that potentially applies to transactions where assets are acquired in exchange for the issue of shares as consideration, including asset-for-share transactions in terms of s42 of the Act. Section 24BA will apply where the consideration is different from the consideration that would have applied if the transaction were between independent persons dealing at arm’s length. Where the consideration is not arm’s length, the application of s24B will result in either a deemed capital gain for the issuing company, or a deemed dividend in specie paid by the issuing company.
SARS ruled that s24BA would not apply to the proposed transaction on the basis that it falls within the exclusion provided for in s24BA(4)(a)(ii). The said section provides that s24BA does not apply where the transferor of the asset will hold all the shares issued by the issuing company immediately after the acquisition of the asset by that company.
SARS also ruled that the transfer of the shares in Company A (the assets) and the issue of the equity share to the applicant, would neither constitute a donation for purposes of s54 of the Act, nor a deemed donation for purposes of s58 of the Act (where there is no adequate consideration in respect of the disposal of property), and that accordingly the proposed transaction would not have any donations tax consequences.
Further, SARS ruled that Paragraph 38 of the Eighth Schedule to the Act of the Act would not apply, implying that the proposed transaction would not be seen as a disposal of an asset to a connected person for a consideration not reflecting an arm’s length price.
This ruling is interesting in that, on the face of it, the issue of the additional equity share to the applicant as consideration for the transfer of the shares in Company A to Company B, does not appear to constitute:
- an arm’s length consideration for purposes of s24BA and Paragraph 38 of the Eighth Schedule to the Act; and
- adequate consideration for purposes of s58 of the Act.
SARS nevertheless ruled that these provisions would not apply.