Corporate Rules Flashcards
s1 Group Definition and
s41 Group Definition (8)
s1: Holds 70% of equity shares directly/indirectly *see s1
s41: Group Definition
- S1 Applies; and
a Company does NOT form part of group if:
- co-operative/specific association/ foreign unit trust/REIT
- non-profit
- exempt entity
- PBO
- foreign established company (unless effective place of management in SA)
- company with place of effective management outside RSA
- shares held as trading stock/ share options
s42: Asset-for-share Transaction
Asset-for-share Transaction definition (6)
- Person (seller) – Individual, company or trust
- Disposes of an asset
- To a resident company – effective management or incorporated in SA
- In exchange for equity shares
- MV of the asset >/= tax cost
- At the close of business on day of transaction, the person (seller):
- Must hold a “Qualifying interest”; or
- Be engaged full-time in the business of the company
s42 Qualifying interest
- Any Equity shares in a listed company or a portfolio of a CIS; or
- An interest that constitutes >/= 10% holding in equity shares and voting rights; or
- Equity shares in a fellow group company
s42 consequences for transferor (5)
- Trading stock is deemed to be transferred at tax value (irrespective of what the agreed price actually is) and no taxable income arises
- A capital asset is deemed to be transferred at base cost, and no capital gain arises
- An allowance asset is deemed to be transferred at tax carrying value, and no recoupment
arises - The shares received in exchange are deemed to be acquired at the same tax cost/base cost/tax carrying value as the asset(s) transferred
- The shares received are deemed to have been acquired on the same date as the assets transferred, except for the purposes of considering whether s9C applies
s42 consequences for the transferee (4)
- Each asset is deemed to be acquired at the tax cost/base cost/tax carrying value of the transferor
- Each asset is deemed to have been acquired on the same date as it was acquired by the transferor
- The acquirer continues to claim any allowances to which the transferor was entitled
- (the collective effect of these consequences is a rollover to the acquirer)
- The CTC of the acquirer increases by the tax cost/base cost/tax carrying value of the assets acquired
Consequences of consideration received in addition to shares s42(4)
If the transferor of the asset(s) receives in exchange both shares and cash, s42 applies only to the extent of the shares received.
For example, if half the total consideration (by market value) was shares, and half was cash, then s42 will apply to half of the disposal, i.e. half of every recoupment etc will be recognised, and half will be rolled over.
s45 Intra-group Transactions:
s45(1) Definition
S45(1): Intra-group transaction, means any transaction where:
- Asset is disposed by company
- To another company that is a resident; and
- Both companies form part of same group as at the end of day of that transaction
And, transferee acquires the asset from transferor company
- As a capital asset, where transferor held as capital asset
- As trading stock, where transferor held as trading stock
–> difference with s41, no need for MV to be greater/equal than TV/BC
S45(2): Effect for transfer of capital asset or trading stock and s45(3) effect for allowance asset
For the transferor:
- Trading stock is deemed to be transferred at tax value (irrespective of what the agreed price actually is) and no taxable income arises
- A capital asset is deemed to be transferred at base cost, and no capital gain arises
- An allowance asset is deemed to be transferred at tax carrying value, and no recoupment arises.
For the acquirer:
- Each asset is deemed to be acquired at the tax cost/base cost/tax carrying value of the transferor
- Each asset is deemed to have been acquired on the same date as it was acquired by the transferor
- The acquirer continues to claim any allowances to which the transferor was entitled
- (the collective effect of these consequences is a rollover to the acquirer)
S45(3A): transfers in exchange for debt or shares (other than equity shares)
– anti-avoidance provision to stop the creation and then sale or writing-off of debt or shares in order to gain a tax advantage.
- If the purchase price is paid in debt or shares (other than equity shares),
- The transferor of the assets is deemed to acquire that debt or those shares at a cost of Rnil.
- This means they have a base cost of Rnil.
However,
- when the transferee repays any of that debt or repurchases any of those shares, the capital gain for the transferor (arising because they have a base cost of Rnil) is disregarded.
- BUT if the debt/shares are instead sold outside the group, the transferor has a capital gain.
S45(6): circumstances under which s45 does not apply (6)
- Receipts/accruals exempt
- Asset in exchange for equity shares
- Asset constitutes dividend in specie
- Asset disposed of ito s47 liquidation distribution
- Asset constitutes a share in the transferee company
- Both agree in writing that s45 doesn’t apply
VAT and the corporate rules
s8(25) of VAT Act
The buyer and seller are deemed to be one and the same person if:
- The buyer and seller are both VAT vendors;
- The provisions of s42 or s45 (or other Corporate Rules sections) apply;
- And the assets are disposed of as and capable of operating as a going concern (s42 and 45
transactions only)
