However, these unbundling transactions are subject to an anti-avoidance rule in section 46(7) of the Act aimed at limiting the extent to which taxpayers can distribute shares in resident companies to non-residents on a tax neutral basis. In simple terms, section 46(7) of the Act excludes the shareholders and the unbundling company from benefitting from the rollover relief if 20% or more of the shares in the unbundled company are, after the transaction, held by “disqualified persons” (including, amongst others, non-residents), either alone or together with persons connected to those non-residents.

National Treasury has identified that the current rule creates a loophole in that the 20% exclusionary rule may not apply where non-resident shareholders are not connected persons in relation to each other. In other words, non-residents may collectively hold 20% or more of the shares in the unbundled company, but to the extent that they are all independent, the anti-avoidance rule in section 46(7) of the Act would not be applicable as one would not breach the 20% threshold. To close this loophole, it has been proposed that the relevant legislation be amended to ensure that the rule applies irrespective of whether the non-resident shareholders are connected persons in relation to each other.