It is often the case that South African companies transfer assets, be it trading stock or capital assets, to other companies in the same group of companies, where those assets can be optimally utilised. Section 45 of the South African Income Tax Act provides the so-called group relief provision which allows for such transfers to take place on a tax-neutral basis between companies forming part of a group of companies. In terms of section 41 of the Income Tax Act, section 45 applies notwithstanding the other provisions of the Income Tax Act. In other words, section 45 will apply to transactions that qualify, unless the parties agree in writing that section 45 do not apply.

On the face of it, a tax-neutral transfer between group entities seems preferred, however, the automatic application also means that section 45 may apply inadvertently. This may result in unforeseen or incorrect tax positions for both the disposing and acquiring group companies. 

To illustrate this, take for example, a holding company with two wholly-owned subsidiaries. Subsidiary A imports/manufactures/assembles products which it sells, at market value and on loan account, to Subsidiary B, who distributes the products to the market. The parties may accept and record the transactions as the disposal of trading stock at market value, with the resultant tax consequences for Subsidiary A. However, unless the parties agree in writing that section 45 does not apply, the transaction will be deemed to take place on a tax-neutral basis. In other words, Subsidiary A will be deemed to have disposed of the assets at its tax cost (meaning no taxable income will arise for Subsidiary A in respect of the disposal) and the entire income will be taxed in Subsidiary B (Subsidiary B will use the rolled over tax cost history for this purpose). A distinctive feature of section 45, similar to section 42, is that it contains a nature requirement. 

Intra-group transactions could be affected either on loan account or for cash, at market or book value, and it can even be donated. It is often the case that these transactions are entered into on loan account to be settled at a later stage. The automatic application of section 45 could also result in another inadvertent tax consequence in relation to this loan account. In terms of section 45(3A), the base cost of such a loan will be deemed to be Rnil. If this loan account is disposed of, or settled, by a party that does not form part of the same group of companies, tax is triggered on the repayment. The base cost of such loans has also been the subject of a number of recent amendments to the Income Tax Act as well. 

The Income Tax Act does, however, make provision for several instances in which the application of section 45 is excluded. In terms of section 45(6) these exclusions include: 

  • a written agreement between the disposing and acquiring company;
  • where the acquiring company is an exempt entity;
  • where the asset is disposed of for equity shares issued by the acquiring company;
  • where the asset is a share distributed by the disposing company to the acquiring company (i.e., a dividend in specie);
  • if the asset was transferred in terms of a liquidation distribution (section 47); and 
  • if an asset is a share in the acquiring company. 

In simple terms, if any other corporate rules apply, section 45 cannot find application. Section 45 also does not apply where no tax becomes payable. It is important to consider every transaction, even in a group context, from a tax perspective to ensure that the correct tax consequences are accounted for in the correct entity.