Restructuring companies via the corporate rules : tax methodology and analysis

• Author: Milton Seligson
• Record Number: btclq_v10_n2_a2
• Published date: 01 June 2019
• Pages: 1-12
• DOI: 10.10520/EJC-16a8dfe1f2
• Date: 01 June 2019

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© SIBER INK

Restructuring Companies via

the Corporate Rules:

TAX METHODOLOGY AND ANALYSIS

MILTON SELIGSON SC*

ABSTRACT

This article discusses the use of the special corporate rules in Part III of Chapter

II of the Income Tax Act 58 of 1962 (‘the Act’) which afford ‘rollover’ tax

relief, to facilitate a corporate restructure of a group of companies.

These special rules are embodied in sections 41 to 47 of the Act and relate

to asset-for-share transactions (section 42), substitutive share-for-share trans-

actions (section 43), amalgamation transactions (section 44), intra-group

transactions (section 45), unbundling transactions (sections 46 and 46A), and

transactions in respect of liquidation, winding-up and deregistration (section

47). These rules are detailed and specif‌ic and contain numerous anti-avoid-

ance measures to curtail their use. Their effect, when they apply, is to defer

the taxation of income and capital gains. Section 41 is a general provision

applicable to every rule, and section 41(2) provides that the corporate rules

override any provision to the contrary in the Act, save for certain specif‌ied

provisions. It is therefore of the utmost importance where a transaction under

the corporate rules is involved, to consider whether any tax provisions that

continue to apply in terms of section 41(2) have any application.

The purpose of the article is to illustrate how the corporate rules work

in practice and the methodology that has to be followed in analysing their

application, by posing a hypothetical group restructure as an example.

The proposed restructure steps are explained and their effect is discussed.

Thereafter the tax implications of each of the proposed restructure steps

are analysed and tested against the applicable provisions. The steps include

section 42 asset-for-share transactions, section 46 unbundling transactions

and section 47 liquidation transactions. Where they may be applicable, anti-

avoidance provisions of the corporate rules are discussed, as well as provisions

of the Act that may apply in terms of section 41(2) to override the tax relief

provided by the special rules, including section 24BA and paragraph 11(1)(g)

of the Eighth Schedule. The possible application of paragraph 43A of the

Eighth Schedule is considered in the context of the unbundling transactions.

The article also deals with the potential application of the General Anti-

Avoidance Rule (‘the GAAR’) as contained in sections 80A–80L of the Act, and

also whether the restructure would be open to attack as a simulated transac-

tion. It concludes that the restructure is not likely to be exposed to attack

under these rules.

Finally, the issue of whether the restructure would constitute a reportable

arrangement under section 35 of the Tax Administration Act is raised. The

conclusion is that more details of the f‌inancial inter-relationship between

the companies concerned and the applicable contractual terms would be

required to conf‌irm that the arrangement would not be reportable.

* Honorary Member, Cape Bar.