CORPORATE

RE-ORGANISATIONS

Muneer Hassan
Special Re-organisation
relief

• Known as “corporate rules”

• SARS’ objective is to ensure:

– If there is a disposal of asset (“scope”)

– that NO tax is triggered! (“implication”)

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Six sections

• Section 42: Asset-for-share transactions

• Section 43: Share-for-share transactions

• Section 44: Amalgamation transactions

• Section 45: Intra-group transactions

• Section 46: Unbundling

• Section 47: Liquidations & deregistrations 3

Examinable
Pronouncements

• Section 42: Asset-for-share transaction

• Section 45: Intra-group

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 Asset for shares:
Basic example
The  sells an asset to company

 Sells an asset 
 for shares Market value
Tax value
R10m
R7m
in exchange for 10% shares
issued by resident company

Resident company

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 Basic example: Seller

The  sells an asset to company

 Sells an asset

 for shares Market value
Tax value
R10m
R7m
in exchange for 10% shares
issued by resident company

Resident company Tax implication for Seller

 Recoupment ?
Capital gains tax ?

 Value of the shares ?

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 Basic example: Acquiror

The  sells an asset to company

  for shares Market value

Tax value
R10m
R7m
 Acquire an in exchange for 10% shares
asset issued by resident company

Resident company Tax implication for

Resident company

 Base cost/Tax value

of asset acquired: ?

 For issuing shares ?

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Sections ?

• S42: Asset-for-share transactions.

• S40CA: Acquisitions of assets in

exchange for shares… issued.

• S24BA: Non-arm’s length asset-for-share

transactions

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Sections sequence

 S42: Asset-for-share transactions.

 S40CA: Acquisitions of assets in

exchange for shares… issued.

 S24BA: Non-arm’s length asset-for-share

transactions

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Corporate rules objective

• A disposal of an asset

• triggers NO tax implications !

(i.e. the disposal is a tax neutral transaction)

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Corporate rules:
SARS objectives

• No tax cash outflow:

– No trading profits
– No recoupments
– No CGT
– No transfer duty
– Some instances: No VAT

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Corporate rules:
Implications

• Achieve objective by deeming to sell:

– Trading stock @ tax value

– Allowance asset @ tax value

– Capital asset @ base cost

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Asset-for-share transactions:
Dispose

 Resident
disposes of company
asset(s)

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In exchange for:
Share + hold qualifying interest

 
≥ 10% any %

Resident Resident
company OR company
(unlisted) (listed)

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In exchange for:
Share + full-time job

Full-time job in
 Resident company

Resident
company

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S42 only applies to the
following transactions:
Resident
 disposes of asset(s)
company

1 Dispose of capital asset Acquires as capital asset (capital

(incl. allow. Asset) or allow. Asset)
2 Disposes of trading stock Acquires as trading stock
3 Disposes of capital asset Acquired as trading stock
(incl. allow. asset)
4 Going concern contract Going concern contract

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Section 42: Implications

• Deemed to sell:

– Trading stock @ tax values

– Allowance asset @ tax value

– Capital asset @ base cost

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Example

• Mr A currently carries on a second-hand

car business in his own name. He decides
to rather trade through a company.

• All the assets (trading stock, capital assets

and allowance assets) of his business are
sold to a new resident company. In
exchange, the new resident company
issues all the new shares to Mr A.
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Values of assets

Trading stock
Tax value R5 million
Market value R8 million

Capital asset
Base cost R1 million
Market value R1.2 million

Allowance asset
Original cost R200 000
Base cost/Tax value R40 000
Market value R250 000 19
Tax implications for Mr A

Trading stock
Sell @ tax value R5 million
Section 11(a)/S22 (R5 million)
(would have been a trading profit of R3 million if:
the corporate rules did not apply or
the parties elected it not to apply)

Capital asset
Proceeds @ tax value R1 million
Base cost: (R1 million)
No capital gains tax R0
(would have been a capital gain of R200 000 if:
the corporate rules did not apply or
the parties elected it not to apply)
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Tax implications for Mr A

Allowance asset
Recoupment
Proceeds @ tax value R40 000
– Tax value (R40 000)
R0
(would have been a recoupment of R160 000
SP:R250k, Ltd to cost: R200k – Tax value:R40k) if:
the corporate rules did not apply or
the parties elected it not to apply)

Proceeds @ tax value R40 000

Base cost: (R40 000)
No capital gains tax R0
(would have been a capital gain of R50 000 if:
the corporate rules did not apply or
the parties elected it not to apply) 21
Tax implications for Mr A

• Tax value of shares in new company

for Mr A
?

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Tax implications for
Resident company

Tax values of assets

Trading stock R5 million

Capital assets - base cost R1 million

Allowance assets R40 000

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Tax implications for
Resident company

Opening stock - trading stock (R5 million)

Capital assets - base cost -

To be used when capital assets are disposed

Allowances will continue with R40 000

You will not restart with write-off period
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Tax implications for
Resident company

• Value of issuing shares in resident

company (CTC)

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Scope: Identify

• Corporate rules apply where:

– there is a disposal of an asset

BUT

– the taxpayer is still “linked” to the asset

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Asset-for-share transactions

Person held cars in  Cars now held by co.

own name Person holds shares

Was: Asset holding  Now: Shareholding

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Example 1 on allowances

Year 1
• Assume the original taxpayer bought
a new manufacturing asset for R1m.

• An asset-for-share (S42) takes place.

• Either the original owner or the new owner can claim

the R400k S12C in year 1.

• If original owner claims: If new owner claims:

S42 transfer @ R600k S42 transfer @ R1m

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Example 2 on allowances

Year 1

• Assume the original taxpayer bought

a new manufacturing asset for R1m.

• An asset-for-share (S42) takes place.

• Assume the original owner claims the R400k

S12C in year 1.

• So the transfer will be at a tax value of R600k

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Example 2 continued

Year 2
• New taxpayer claims R200k S12C allowance

Year 3
• New taxpayer claims R200k S12C Sell the asset for R1.1m

• Recoupment: SP (Ltd to cost) R1.1m ltd to R1m

Less Tax Value (R200k)
Recoupment R800k

• CGT: Proceeds – recoupment R1.1m – R800k = R300k

Less Tax value (R200k)
Capital gain R100k
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Asset-for-share transactions:
Dispose

 Resident
disposes of company
asset(s)

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In exchange for:
Share + hold qualifying interest

 
≥ 10% any %

Resident Resident
company OR company
(unlisted) (listed)

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In exchange for:
Share + full-time job

Full-time job in
 Resident company

Resident
company

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Example

• Mr A currently carries on a second-hand

car business in his own name. He decides
to rather trade through a company.

• All the assets (trading stock, capital assets

and allowance assets) of his business are
sold to a new resident company. In
exchange, the new resident company
issues all the new shares to Mr A.

• Mr A is a VAT vendor 34
Other issues

• VAT

– Normal VAT, unless section 8(25) of VAT Act

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Other issues

• Transfer Duty

• Donations Tax

• Contributed Tax Capital

• Anti-avoidance
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Sequence of sections

• S42: Asset-for-share transactions.

• S40CA: Acquisitions of assets in

exchange for shares… issued.

• S24BA: Non-arm’s length asset-for-share

transactions

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 Basic example:
If section 42 not applicable
The  sells an asset to company

  for shares Market value

Tax value
R10m
R7m

 Acquires an in exchange for 5% shares issued

asset by resident company, the market
value which is R10m

Resident company
Tax implication for
Resident company

Section 11(a) –
“actually incurred” ? 38
Section 40CA

Scope:
• Company acquires any asset
• from any person
• in exchange for shares issued
Implication:
• Deemed to have actually incurred…
equal to the MV of the shares
immediately after the acquisition

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 Basic example: Acquiror

The  sells an asset to company

  for shares Market value

Tax value
R10m
R7m

 Acquires an in exchange for 5% shares issued

asset by resident company, the market
value which is R10m

Resident company
Tax implication for
Resident company

Acquire asset for R10m

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 Basic example: Seller

The  sells an asset to company

 Sells an asset

 for shares Market value
Tax value
R10m
R7m
in exchange for 5% shares issued
by resident company, the market
value which is R10m

Resident company
Tax implication for seller

?
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Sequence of sections

• S42: Asset-for-share transactions.

• S40CA: Acquisitions of assets in

exchange for shares… issued.

• S24BA: Non-arm’s length asset-for-share

transactions

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Section 24BA

Scope:
• MV of asset > MV of shares; or
• MV of shares > MV of assets

In other words

Not arm’s length

Mismatch
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MV of asset > MV of shares
Implication

Asset
R200 000

 Company A

Shares
R150 000

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 Normal Implication & S40CA

BC of shares: R200k
Normal Implications Asset
R200 000

 Company A BC of asset:
R150k
s40CA
Shares
R150 000

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Additional implications:
Mismatch where MV of asset >
MV of shares

• Seller’s:  BC of shares 

• Acquiror:  Realise capital gain

 Increase BC of asset
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 Section 24BA(3)(a) & S40CA
Implication
BC of shares R200k
S24BA (R50k) Asset
R200 000 Deemed
Capital Gain:

 Company A
R50 000 (S24BA)

Shares
R150 000

BC of asset:
R150k + R50k
(S40CA) 47
Additional implications:
Mismatch where MV of asset >
MV of shares

• Seller’s:  BC of shares 
(section 24BA(3)(a)(ii))

• Acquiror:  Realise capital gain

(section 24BA(3)(a)(i))
 Increase BC of asset
(section 40CA(a)(ii)) 48
 Normal Implication & S42

BC of shares: R200k
Normal Implications Asset
R200 000

 Company A BC of asset:
R200k
s42
Shares
R150 000

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 Section 24BA(3)(a) & S42
Implication
BC of shares R200k
S24BA (R50k) Asset
R200 000 Deemed
Capital Gain:

 Company A
R50 000 (S24BA)

Shares
R150 000

BC of asset:
R200k + R50k
(S42) 50
Additional implications:
Mismatch where MV of asset >
MV of shares

• Seller’s:  BC of shares 
(section 24BA(3)(a)(ii))

• Acquiror:  Realise capital gain

(section 24BA(3)(a)(i))
 Increase BC of asset
(s40BA(b)) 51
Additional implications:
Mismatch where MV shares >
MV of assets

• Seller’s:  Deemed dividend

• Acquiror: Nothing

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Section 24BA(3)(b)
Implication

Asset
R150 000

 Company A

Shares BC of asset:
R200 000 R200k
(S40CA)

Deemed Dividend in-specie

to  of R50 000
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Section 24BA(3)(b)
Implication

Asset
R150 000

 Company A

Shares BC of asset:
R200 000 R150k
(S42)

Deemed Dividend in-specie

to  of R50 000
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Examinable
Pronouncements

• Section 42: Asset-for-share transaction

• Section 45: Intra-group

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Intra-group

Group of
 companies

Disposes of
an asset(s)
Transferee
Transferor (Resident)

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Intra-group

View from holding company’s perspective

• Assets held by one  Assets now held

group company by another group
company

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Example

Which companies form part of a group of

companies from a tax perspective?

HoldCo

100% 51%

Subsidiary A Subsidiary B
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S45 only applies to the
following transactions:
Transferor disposes of asset(s) Transferee
Resident
1 Dispose of capital Acquires as capital
asset (incl. allow. asset (capital or allow.
Asset) Asset)
2 Disposes of trading Acquires as trading
stock stock
3 Going concern Going concern contract
contract
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Section 45: Implications

• Deemed to sell:

– Trading stock @ ?

– Capital assets @ ?

– Allowance asset @ ?
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