Restructuring companies via the corporate rules : tax methodology and analysis
Author | Milton Seligson |
DOI | 10.10520/EJC-16a8dfe1f2 |
Published date | 01 June 2019 |
Date | 01 June 2019 |
Record Number | btclq_v10_n2_a2 |
Pages | 1-12 |
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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.
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