Spotlight on value-shifting between companies
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.