Further refinements to the corporate rollover relief provisions

21 Feb 2024 2 min read Special Edition Budget Speech Alert 2024 Article

Amalgamation transactions

The disposal of assets by a company to another company in terms of an amalgamation, conversion or merger should trigger a taxable transaction. Depending on the tax profile of the assets transferred, these disposals could trigger capital gains, other taxable gains and the recoupment of allowances previously claimed. Section 44 of the ITA enables qualifying taxpayers to transfer assets in a tax neutral manner to defer the tax consequences while not eroding the South African tax base.

The roll-over relief provisions apply to transactions falling into the following types of amalgamation transactions –

(a) A South Africa resident company disposing of its assets to another South African resident company,

(b) A foreign company disposing of its assets to a South African resident company, and

(c) A foreign company disposing of its assets to another foreign company within the same group of companies.

The intention was not that section 44 should be applied to engineer a permanent deferral of the tax consequences by transferring assets to wholly or partially income tax exempt entities or entities falling entirely outside the South African income tax net. The Minister announced that National Treasury will review the section to ensure its application is aligned with the stated intention.

Degrouping provisions

Section 45 of the ITA provides for a deferral of capital gains, taxable gains and the recoupment of allowances previously claimed for qualifying “intra-group transactions”. Generally speaking, in order to qualify as an “intra-group transaction” and access the roll-over relief provisions, the purchaser and seller should form part of the same group of companies at the end of the day of the transaction.

If the purchaser ceases to form part of the same “group of companies” as the seller, or if the purchaser ceases to form part of the same group as the controlling group company in relation to the seller, the tax neutral treatment unwinds in the hands of the purchaser. This is commonly referred to as a “de-grouping charge” and is triggered if the de-grouping takes place within six years of the acquisition.

It is proposed that the de-grouping charge will be narrowed to avoid the de-grouping charge when there is a change in shareholding while purchaser and seller still remain part of another group of companies.

This should be welcomed by financiers looking to enforce their security in structures containing historic section 45 transactions.

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