Section 42 of the Income Tax Act (58/1962) (the Act) provides for tax roll-over relief in respect of asset-for-share transactions. Such a transaction is an asset-for-share transaction if it meets all the following requirements:
- A person transfers an asset, other than a restraint of trade or personal goodwill, to a company;
- The market value of the asset equals or exceeds its base cost;
- The company to which the asset is transferred must be a resident company;
- The company issues an equity share in that company to the person as consideration for the asset;
- The person who transferred the asset holds at least 10% of the equity of the company at the close of day of the disposal or is a natural person who will be engaged on a full-time basis in the business of the company or rendering service; and
- The asset transferred must retain their nature, in other words, capital assets are acquired as capital and trading stock is acquired as such. Capital assets can be converted to trading stock as well.
If the transaction is in compliance with all the above requirements, the transferor will not be liable for capital gains taxes on capital assets or normal tax on the gain for trading stock. The company will acquire the asset at its original base cost and inherit the transferor’s cost history in respect of the assets. This means that the person transferring the capital asset will not be liable for capital gains tax. However, when it disposes of the capital asset, the company will be liable for the full capital gains tax on the original base cost of the asset.
An exemption for Transfer Duty in terms of section 9(1)(l) of the Transfer Duty Act (40/1949) will also apply in respect of the transfer of property regardless if the asset was acquired as a capital asset of trading stock. The application for exemption must be supported by an affidavit of a sworn declaration by the company’s public officer that the transaction complies with all the relevant requirements.
Anti-avoidance rule
The anti-avoidance rule section 42(5) will be triggered if any of the following occur within 18 months of the asset-for-share transaction:
- If a person ceases to hold at least 10% of the equity share, within 18 months of the date of the asset-for-share transaction, or
- the person ceases to hold an equity share in a company that forms part of the same group of companies or
- the person ceases to be engaged on a full-time basis in the business
If any of the above occurs the person will be deemed to have disposed of all the equity shares acquired in terms of the asset-for-share transaction that are still held when the event took place and at an amount equal to the market value of the asset on the date of the transaction.
Above is just a short summary of the relief Section 42 of the Act has to offer. There may be various reasons and benefits to restructuring your assets according to the above asset-for-share transaction provisions. This can be an effective tool to neutralise the possible tax consequences in the restructuring of your group or even your estate. Please feel free to contact us and schedule an appointment to see if these provisions will benefit you.
