What is it and when is it relevant?
Remember our post from last week, dealing with “asset-for-share transactions”? This is instalment number two of our short series on the so-called “corporate rules” as contemplated in Part III of Chapter II of the Income Tax Act, No. 58 of 1962 (the “Act”). Today, we briefly consider “amalgamation transactions”.
An “amalgamation transaction” is defined in section 44(1) of the Act as, inter alia, “any transaction (i) in terms of which any company (the “amalgamated company”) which is a resident disposes of all of its assets (other than assets it elects to use to settle any debts incurred by it in the ordinary course of its trade and other than assets required to satisfy any reasonably anticipated liabilities to any sphere of government of any country and costs of administration relating to the liquidation or winding-up) to another company (the “resultant company”) which is a resident, by means of an amalgamation, conversion or merger and (ii) as a result of which the existence of that amalgamated company will be terminated.” It can be a once-off transaction or merely a step within a series of transactions as part of a larger corporate restructuring.
The requirements:
The requirements that need to be met for the transaction to qualify for the roll-over tax relief are:
- The amalgamated company must be a resident;
- the amalgamated company must dispose of all its assets to the resultant company (other than specific assets retained to settle normal debts);
- the resultant company must be a resident; and
- within a period of 36 months after the date of the amalgamation transaction, or such further period as the Commissioner may allow, the amalgamated company must take the steps contemplated in section 41 (4) to liquidate, wind up or deregister.
Consequences:
Section 44 of the Act provides for roll-over relief similar to section 42. No capital gains tax will be paid on the disposal because the assets are deemed to be disposed of for an amount equal to their respective base costs (capital asset) or their respective tax costs (trading stock). If the asset is an allowance asset, no recoupments will be included in the amalgamated company’s taxable income either.
The amalgamated company is deemed to dispose of any equity shares it acquired in the resultant company to its shareholders. Such disposal is disregarded for purposes of determining the amalgamated company’s taxable income or assessed loss. The person or persons who held the shares in the amalgamated company is/are, in turn, deemed to have disposed of their shares in the amalgamated company and to acquire shares in the resultant company. Such disposal by the shareholders of the amalgamated company of their shares in the amalgamated company is deemed to occur for an amount equal to its base cost (if the shares were held as capital assets) or its tax cost (if trading stock). Essentially, the shares in the amalgamated company are replaced by the shares in the resultant company in the hands of the erstwhile shareholders with no adverse tax consequences.
Pitfalls:
As is usually the case with complex transactions, there are quite a number of pitfalls and exceptions. If the amalgamation transaction is not planned or implemented correctly, unwanted tax consequences may follow, which can be costly and catch you by surprise.
It is therefore imperative that you consult with your tax advisor before you implement a restructure which involves an amalgamation.