Companies and special corperate rules

Question 1

What is section 45 and when does it apply?

Answer 1

• it’s to help with intergroup transactions
• is applies when one company disposes of an asset to another company which is a resident company and both companies form part of the same group of companies and
• as a result, the transferee company acquires the asset as capital where the transferor held it as capital or as trading stock where the transferor held it as trading stock

Question 2

What happens when we acquire shares as consideration for an asset?

Answer 2

24BA(3)
- the value mismatch will result in a capital gain in the hands of the person who acquires the asset if the asset was worth more than the shares
* furthermore the Capital gain will be deducted from the base cost of the shares for the person receiving them

• However if the shares were worth more than the asset, then the value mismatch will be a deemed dividend in specie in the hands of the person receiving the shares and is paid on the date of the issue

Section 24BA(3)(a)(ii)
- the base cost of the shares is the market value of the asset less the capital gain

Section 40CA(a)
- the company issuing the shares is deemed to have incurred expenditure of the market value of the shares and so the base cost of the asset is the market value of the shares + the capital gain incurred by them from the accounting mismatch

Section 42
- I dont know what it says

Question 3

What is section 42 and when does it apply?

Answer 3

• this section relates to Asset for share transactions
• but the transaction needs to meet the following specific requirements
• someone must dispose of an asset
• to a resident company
• for equity shares
• the market value of the asset must exceed or equal its base cost/tax cost
• the person disposing of the asset must be holding a qualifying interest in the company at the close of the day of disposal OR
• If it’s natural person they could also be engaged on a full time basis in rendering services in the business of the company or a controlled group company in relation to the company
• the transferee company must acquire the asset
  / as trading stock where the transferor held it as trading stock
  / as capital where the transferor held it as a capital asset
  / as trading stock where the transferor held it as capital asset as long as the transferor and transferee do not form part of the same group of companies

Question 4

What is a qualifying interest?

Answer 4

• equity shares that are held by a person in
• a listed company( or will be in 12 months)
• a portfolio of collective investment scheme securities
• a company with a holding of at least 10% equity shares and voting rights of that company
• a company if that person and that company form part of the same groip of companies
• a portfolio of a hedge fund collective investment scheme

Question 5

What are the rules of section 42 when the person is disposing of a capital asset?

Answer 5

Section 42(2) and (3)
For The person disposed in off the capital asset
- disposal is at base cost(which is the tax value)
- this is not a disposal event
- base cost of shares is carried over from asset
- no recoupment
- shares are deemed to be acquired on the same date as the original asset

For the company acquiring the capital asset
- deemed to have acquired the asset at base cost(tax value)
- where the asset has an allowance the company takes over the tax history
- if there is a capital allowance that is not apportioned, the acquirer gets the allowance

Question 6

What are the section 42 rules when the person is disposing of trading stock?

Answer 6

Section 42(2) and (3)
For person disposing of the training stock
- disposal is at the tax value and the tax value is the base cost of the shares

For the company acquiring the trading stock
- they are deemed to have acquire the train stock at the tax value that it was disposed that

For the company acquiring trading stock that was held as a capital asset
- the cost is deemed to be the base cost
- unrealized capital gain is taxable revenue profit on disposal

Question 7

In terms of section 42, What happens when there is additional consideration with the shares for the asset?

Answer 7

Section 42(4)
- The additional consideration will be deemed to be a disposal other than in terms of an asset for shared transaction and will not qualify for rollover relief
- an apportionment is required between the part of the disposal that qualifies for the asset for share transaction and the part is that not qualify for the asset for share when section
- the portion must be done on the basis of a relevant market value of the elements of the consideration

Question 8

When will section 42 not apply?

Answer 8

Section 42(8A)
- when the party’s agree in writing of the section does not apply
- when did termining the tax for income or assessed loss of that person
- when the asset disposed of constitutes a debt owning or share in the company
-

Question 9

What is section 41 and when does it apply?

Answer 9

~ section 41 is a bunch of definitions that override the normal tax rules in the act other than specific sections
* 24BA
* 40CA(b)
* 24I
* 25BB(5)
* 80A to 80(L)
* 103

~ it states that a group of companies is as defined in section 1 unless these situations occur
* The company is a non-resident that doesn’t have it’s place of effective management inside the country

~ other unimportant things

Question 10

What is a group of companies according to section 45?

Answer 10

The definition comes from section 1 stating something

Question 11

What are the relief measures of section 45?

Answer 11

Section 45(2) and (3)
- capital asset transferred at base cost to transferor along with tax history
- trading stock transferred at tax value to transferor
- allowances and recoupments transferred

Question 12

In what circumstances does section 45 not apply?

Answer 12

Section 45(6)
- the parties agree in writing of the section doesn’t apply
- the asset was disposed of by the transferor company in exchange for equity shares issued by the transferee company
- the asset constitutes a share that is distributed by the transferor company to the transferee company
- the asset was disposed of in terms of a liquidation distribution
- the asset constitutes a share in the transferee company
- if all the receipts and a cruels of the transferee company are exempt from tax in terms of the following sections
* S10(1)(and others)

Question 13

How do the other taxes Relate to section 42 and section 45?

Answer 13

Section 42
- exemption granted from securities transfer tax
- exemption granted from transfer duty
- if the value of the assets transferred are more than the value of the shares the commissioner can apply section 58 and deem the shortfall to be a donation by the transferor
- there is an exemption from donations tax if the transferor is a public company

Section 45
- exemption granted from security transfer tax
- Exemption granted from transfer duty
- exemption granted from Transit between group companies or if the transferor is a public company
- exemption from dividends tax where the companies are part of the same sa group of companies

Question 14

What is section 24BA and how does it apply?

Answer 14

• it is an anti-avoidance provision and applies when shares are issued on a non-arms length basis in return for one or more assets

s24BA(3)(a)
- where the market value of the asset exceeds the market value of the shares the excess is deemed to be a capital gain for the company issuing the shares and
- the person who transferred the asset must reduce the expenditure incurred to acquire the shares by the excess amount
- section 40CA states of the company must add this capital gain expenditure to the cost incurred to acquire their asset

Section 24BA(3)(b)
- when the market value of the shares exceeds the market value of the asset the excess is deemed to be a dividend in specie paid by the company on the date that the shares which issued

Question 15

What is section 40CA and how does it work?

Answer 15

• this section determines the expenditure incurred by a company that acquires an asset by issuing shares as consideration
• the expenditure incurred in respect of the asset is the sum of
• The market value of the shares immediately after the acquisition and
• Any deemed capital gain in terms of section 24BA(3) (a)
• the section came into effect from 1 January 2022

Question 16

What is section 24O and how does it work?

Answer 16

~ it relates to the incurral of interest in respect of certain debts deemed to be in the production of income when purchasing shares, because normally you can’t deduct it because dividend income is an exempt amount.

~ if a company purchases a controlling interest in an operating company, the interest may be deducted because it was deemed to be in the production of income(it must meet the requirements set out below
* The company must ONLY be part of the same group of companies (according to Section 41 definition) AFTER the transaction
* the shares that it purchase must be equity
* an operating company is defined as a company that’s income consists of at least 80% of receipts and a cruels and
* that income is derived from business continuously carried on by providing goods or services
* the deduction is limited to the extent that the equity share constitutes are qualifying interest in the operating company (see 90% rule)

Question 17

What is Section 23N and how does it relate to s24O

Answer 17

it limits the interest you can deduct on the purchase of those shares, but the limitation only applies for interest being incurred over the next 5 years after the year you get the debt.

Question 18

What considerations should be thought of when considering whether to buy a company through buying the shares or the assets?

Answer 18

Share purchasing considerations
- securities transfer tax (0.25%)
- VAT - exempt supply
- assessed losses
- potential dividend tax liabilities
- memorandum of incorporation
- Captial gains Tax

Asset purchasing considerations
- VAT (sale of a going concern)
- transfer duty on property
- tax allowance on assets
- Captial gains Tax

Question 19

When does section 24BA not apply?

Answer 19

-that company and that person are now part of the same group companies as a result of that asset being acquired
-when that person holds all the shares in the company immediately after that company acquires that asset
-when paragraph 38 of the 8th schedule applies

Question 20

What are the VAT consequences that come along with section 42?

Answer 20

• There is no VAT on the issues of shares because it is an exempt financial service

S8(25)
- this section will only apply if a going concern is being disposed of or a sale and leaseback of fixed property is occurring
- it says that the vendors should both be considered the same person
-so if the section applies, there will be no VAT on the sale of the asset (not shares), if it doesn’t apply, there will be