However, this deeming provision does not apply to any asset in respect of which section 40CA applies. Section 40CA indicates that, if a company acquires an asset from a person in exchange for debt issued by the company, the company is deemed to have actually incurred an amount of expenditure in respect of the acquisition of that asset which is equal to the amount of the debt. The so-called market value rule therefore does not apply. It is important to appreciate that the deeming provision only deals with the acquisition of the asset by the acquiror and does not deal with the accrual in the hands of the seller.

A number of taxpayers have made use of this deeming provision so as to avoid the potential negative consequences of having been deemed to have disposed of an asset at market value. In other words, to the extent that shares are not issued in return for the acquisition of an asset, but the purchaser is a company which becomes indebted to the seller, the consequence of section 40CA of the Act would have been that the asset is deemed to have been acquired for an amount equal to the debt.

To the extent that an asset for share transaction is implemented in terms of section 42 of the Act, the consequences are that:

• the seller is deemed to have disposed of the asset at original base cost;
• the purchaser company is deemed to have acquired the asset at original base cost; and
• the seller is deemed to have acquired the relevant shares issued by the purchaser company at base cost.

The deemed acquisition at base cost and the issue of shares at base cost does not necessarily apply to the extent that a debt is created pursuant to the transfer of an asset.

In terms of section 45 of the Act, an intra-group transaction can be entered into pursuant to which an asset is transferred to another group company in return for the issue of debt. Such debt would then not be subject to tax in the hands of the seller. The argument is thus that, if one reads section 45 of the Act together with section 40CA, one can transfer an asset without paying tax whereas the purchaser company is deemed to have acquired the asset for an amount equal to the debt.

Transactions could thus have been entered into on the basis that:

• the seller of the asset transfers the asset to a new company (Newco) in return for the issue of debt by the purchaser company. In other words, the asset is then transferred to Newco at a cost equal to the debt that is created. The shares in Newco can thereafter be disposed of at market value without triggering the deemed market value provisions as one is disposing of the share in Newco as opposed to the asset that has been acquired by Newco.

The Minister has thus proposed that relevant amendments to the legislation be introduced to address these concerns.