Exemption from STT for intragroup transactions under s 45 of the Income Tax Act : does intra-group redemption of preference shares qualify?

• Author: Milton Seligson
• Date: 01 December 2018
• DOI: 10.10520/EJC-1348433d90
• Published date: 01 December 2018
• Pages: 1-6
• Record Number: btclq_v9_n4_a2

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Exemption from STT for Intra-

group Transactions under s45

of the Income Tax Act:

DOES INTRA-GROUP REDEMPTION OF

PREFERENCE SHARES QUALIFY?

MILTON SELIGSON SC*

ABSTRACT

This article deals with the availability of the exemption from securities transfer

tax (‘STT’) in a transaction involving the redemption of redeemable prefer-

ence shares issued by a South African resident company to another company,

both companies being members of the same group of companies. STT is

payable at the rate of 0.25% by the purchaser on the transfer of any security,

which would include preference shares issued by a South African company.

The article points out that in large corporate transactions involving the acqui-

sition of shares, the amount of STT payable can be very substantial.

The article discusses the exemptions from payment of STT provided for in

section 8(1)(a) of the Securities Transfer Tax Act, according to which a trans-

action falling into any of the group of corporate transactions dealt with in Part

III of Chapter II of the Income Tax Act — the so-called ‘rollover’ provisions —

will be immune from liability for STT.

The article is concerned with the exemption pertaining to intra-group

transactions under section 45 of the Income Tax Act, and whether the acqui-

sition of redeemable preference shares issued by a resident group company

pursuant to their redemption by the issuer from the holder, another company

in the group, would qualify as such an ‘intra-group transaction’, thereby trig-

gering the exemption from payment of STT.

After discussing the def‌inition of ‘intra-group transaction’ in section

45(1)(a), the author considers f‌irstly, whether the redemption transaction

would involve a disposal of an asset by the company that is the holder of the

preference shares and the acquisition of that asset by the issuer company.

The author analyses relevant provisions of the Companies and Income Tax

Acts which lead to the conclusion that there is a disposal of an asset in the

form of the preference shares by the holder and an acquisition thereof by the

redeeming issuer company, as envisaged in the statutory def‌inition of ‘intra-

group transaction’.

The article then explores whether, as a result of the transaction, the asset

comprising the preference shares is acquired by the issuer company as a

capital asset, where the transferor company holds it as a capital asset, as

required by section 45(1)(a)(ii). The author refers to the relevant def‌initions

of ‘asset’ and ‘capital asset’ in section 41(1) of the Income Tax Act, which

specif‌ically governs the corporate rules, and concludes that the requirements

of the section are satisf‌ied.

* Honorary Member, Cape Bar.