The Income Tax Act allows for various so-called group relief provisions which can be used to reorganise a group without triggering any immediate cash tax consequences for the shareholders. The first of these so-called group relief provisions is set out in section 42 of the Income Tax Act, being an “asset-for-share transaction”.
Section 42 allows for shareholders (the transferors) to transfer their shares in a company (the asset) to another company (the transferee) without realising any adverse tax consequences (various other section 42 transactions are also possible, which will not be discussed in this blog post). Section 42 effectively defers these tax consequences until such time as the shareholders or company dispose of the relevant asset.
Section 42 of the Income Tax Act will apply automatically to the transfer of an asset that complies with the requirements (and is not excluded) as set out in section 42 unless the parties elect in writing that the section does not apply. While a written instrument setting out the terms and conditions of the asset for share transaction is not a requirement, it is advisable that the parties record their agreement in writing to prevent any uncertainty or dispute in future. Such an agreement will also assist in addressing any queries by SARS. The agreement should specify the assets transferred and the consideration shares issued by the transferee to the transferor.
Certain requirements in terms of the Companies Act No. 71 of 2008 (“the Companies Act”) need to be complied with, such as a written resolution by the board of directors of the transferor to approve the transfer of the asset. If the asset being disposed of amounts to all or greater part of the assets or undertaking of the transferor, a special shareholder’s resolution in terms of section 112(2)(a) read with section 115 of the Companies Act is required.
The transferee will also require a written resolution by its board of directors to issue the consideration shares to the transferor in exchange for the asset, indicating that the board complied with sections 38 and 40 of the Companies Act.
To ensure that no securities transfer tax is levied on the transfer of the asset, the public officer of the company whose shares are being transferred needs to commission an affidavit in terms of section 8(1)(a)(i) of the Securities Transfer Tax Act No.25 of 2007, stating that the asset for share transaction complies with requirements of section 42 of the Income Tax Act. When the assets being transferred are shares in a listed company, the public officer of the transferee needs to commission an affidavit stating that the asset for share transaction complies with the requirements of section 42 of the Income Tax Act.
It is further important to note that the share certificates of the respective companies involved in the asset for share transaction need to be updated accordingly to reflect the new shareholders.
As always, it is advisable that you consult your tax advisor when considering a corporate restructure or reorganisation.