Spot­light on value-shift­ing be­tween com­pa­nies

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - DAVID WARNEKE

THE 2012 Tax­a­tion Laws Amend­ment Bill pro­poses that the value-shift­ing pro­vi­sions of the eighth sched­ule to the In­come Tax Act will, with ef­fect from Jan­uary 1 2014, ex­clude value-shift­ing ar­range­ments that re­late to com­pa­nies.

A typ­i­cal value-shift­ing ar­range­ment in re­la­tion to a com­pany would oc­cur un­der the fol­low­ing cir­cum­stances. Say Mr A owns all the shares in a com­pany. He causes the com­pany to is­sue, for no con­sid­er­a­tion, shares in the com­pany to his son. The value of Mr A’s shares there­fore de­crease with­out him hav­ing dis­posed of any shares.

This type of value-shift­ing ar­range­ment is de­fined specif­i­cally as a dis­posal in terms of para­graph 11(1)(g) of the eighth sched­ule and, as­sum­ing that the shares held by Mr A are cap­i­tal as­sets in his hands, would trig­ger a cap­i­tal gain in the hands of Mr A.

In the ex­am­ple above the amount of the cap­i­tal gain would be the amount by which the mar­ket value of Mr A’s in­ter­ests had de­creased as a re­sult of the is­sue of the shares to his son.

The rea­son for the ex­clu­sion of value-shift­ing in re­la­tion to com­pa­nies ap­pears to be the in­ser­tion of a new pro­vi­sion, sec­tion 24BA, into the act. This new pro­vi­sion ap­plies if “a com­pany, for con­sid­er­a­tion, ac­quires an as­set from a per­son in ex­change for the is­sue by that com­pany to that per­son of shares in that com­pany; and the con­sid­er­a­tion ... is... dif­fer­ent from the con­sid­er­a­tion that would have ap­plied had that as­set been ac­quired in ex­change for the is­sue of those shares in terms of [an arm’s length trans­ac­tion]”.

Where the pro­vi­sion ap­plies, var­i­ous po­ten­tially ad­verse re­sults en­sue de­pend­ing on whether the mar­ket value of the as­set is more or less than the mar­ket value of the shares.

The pro­vi­sion ap­plies in re­spect of trans­ac­tions en­tered into on or af­ter Jan­uary 1 2013.

How­ever, the drafters of the 2012 bill ap­pear to have over­looked a num­ber of is­sues.

Firstly, sec­tion 24BA only ap­plies if a com­pany ac­quires an as­set for a con­sid­er­a­tion. So, if the shares are is­sued for noth­ing, as in the ex­am­ple above, the new pro­vi­sion will not ap­ply. It would also not ap­pear to ap­ply if the com­pany is­sues the shares for debt, for ex­am­ple on loan ac­count.

Se­condly, the term “as­set” is de­fined for pur­poses of sec­tion 24BA as be­ing “an as­set as de­fined in para­graph 1 of the Eighth Sched­ule”. That def­i­ni­tion ex­cludes “any cur­rency”.

There­fore if shares are is­sued for a nom­i­nal amount of cash sec­tion 24BA will not ap­ply.

We ex­pect a correction to ap­pear in the next round of amend­ing leg­is­la­tion.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.