Asset-for-share Transactions: THE NUMBER-OF-SHARES CONUNDRUM*

• Jurisdiction: South Africa
• DOI: 10.10520/ejc-btclq_v16_n1_a4
• Author: Duncan McAllister
• Pages: 14-19
• Date: 01 March 2025
• Published date: 01 March 2025
• Published By: Siber Ink

14 © Juta and Company (Pty) Ltd

Asset-for-share Transactions:

THE NUMBER-OF-SHARES CONUNDRUM*

DUNCAN MCALLISTER†

ABSTRACT

This article relates to asset-for-share transactions under section 42 of the

Income Tax Act and addresses the question as to how many shares must be

issued to the transferee company in exchange for the asset or assets trans-

ferred, so as to comply with the section.

The author gives examples to illustrate the operation of section 42 and

the problems that can arise in asset-for-share transactions, particularly where

assets have different values and more than one share is issued in exchange. It

is suggested that if there are insuff‌i cient shares available to match the relative

value of the assets being exchanged, the solution is to allocate the aggregate

base cost of the assets to the shares issued. This solution will not, however work

in the case of pre-valuation date assets, for which there are different methods

prescribed for determining value. In such a case, the solution suggested is to

allocate shares with distinctive certif‌i cate numbers to particular pre-valuation

date assets based on their relative market value. The author suggests that,

alternatively, it may be time for legislative intervention to simplify matters,

by the introduction of a rule similar to that in paragraph 76B of the Eighth

Schedule to the Act.

The article suggests that SARS should give comfort to taxpayers by adopting

the suggested solution for post-valuation date assets in an Interpretation

Note, or perhaps resorting to legislation to resolve the complexity.

Finally, the article also considers the application and effect of the value-for-

value rule in section 24BA of the Income Tax Act, which applies to section 42

asset-for-share transactions.

Section42 of the Income Tax Act58 of 1962 (Act) deals with asset-for-share

transactions. It provides roll-over relief for persons wishing to transfer

assets to a company in exchange for an issue of shares. But how many

shares must the transferee company issue in exchange for an asset or assets?

Before attempting to answer this question, it might be helpful to explain

the basics of section42 with reference to a simple example.

Example 1 — Basic asset-for-share transaction

Facts

John owns a piece of vacant land which he acquired on 1 March 2008 at

a cost of R20. The current market value of the land is R100. He wishes to

transfer the land to Newco (Pty) Ltd (Newco), a resident, in return for shares

* This article was f‌i rst published in Accountancy SA (February 2024) and is repro-

duced with permission.

† MCom (Tax), CA(SA).

2025 16(1) BTCLQ 14

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