The most common way of purchasing a property is whereby a Seller sells a property for a certain amount and the Purchaser settles the purchase price by either cash or a loan from a financial institution or perhaps a combination of both.
However, there are other ways in which a legal entity, this specifically being the case with a company, may settle the purchase price by means of issuing new shares to the Seller as consideration for the property acquired.
Section 42 of the Income Tax Act of 1962 (Act) defines this exchange as an Asset-for-Share transaction. In other words, the Seller disposes of an asset to a company for the issue by that company of new shares (equity shares) where the value of these shares corresponds to the value of the property acquired.
There are however quite a few requirements provided for in the Act in order for a transaction to qualify as an Asset-for-Share transfer. These requirements include that an asset must be disposed of by any person to a South African resident company; that the asset must be transferred at base cost if a capital asset or tax cost if trading stock and that the asset must be exchanged for equity shares in the acquiring company.
It’s a consequence of an asset-for-share-transaction that the asset acquired, retains is nature. In other words, if the asset transferred was held by the Seller as a capital asset the acquirer will also hold it as a capital and the same applies to stock in trade items.
Now you may ask then what of taxes?
Section 42 of the Act allows the transaction to be carried out in a tax neutral fashion, or put differently without any tax being levied as a result of the transfer that took place as an asset-for-share transaction (similar to barter transaction) provided that the anti-avoidance measures aren’t triggered. With regard to transfer duty, a specific exemption is in place exempting the payment of transfer duty on the acquisition of the asset in terms of Section 9(15A) of the Transfer Duty Act.
Rollover relief is applied neutralising the income tax effect of the transaction as the property is deemed to have been disposed of at either its base cost (capital asset) or its tax value (stock in trade) which means that the acquisition price equals the base value which results in no taxable gain being realised. This means that the Seller will not be liable for the income tax on the transaction which of course includes gains realised from the disposal of capital assets.
The roll-over means that the entity that acquired the property through this asset-for-share transaction effectively steps into the shoes of the seller as the owner since the date on which the seller acquired the property. By way of example, where the seller acquired the property in 2010 for consideration of R100 and the property is currently worth R160 in 2020, when the acquirer obtains the property it does so at the base value being the R100. The effect is that the seller acquired and disposed of the property at R100 meaning to gain was realised whilst the gain is rolled over to the seller who is deemed to have acquired it at R100. Should the acquiring entity sell the property the very next day for R170, the gain it realises will be R70 and not R10.
The other side of the example is that the shares issued to the seller will be at the market value of the property being the R160 and not R100. Please however note that section 42(5) of the Act included includes an anti-avoidance provision. In terms of this section a person who disposes of more than 50% of the assets transferred in terms of an asset-for-share transaction within 18 months after the date of acquisition, will be taxed on revenue account and not capital notwithstanding the provisions of section 9C.
Asset-for-Share transactions can be quite complex and there are numerous requirements, exemptions, and specific applications of these transactions. It is important that you consult with one of our Conveyancers or Tax Consultants at Johang@stbb.co.za or Leanis@stbb.co.za in order to ensure that you obtain the best possible advice and understanding of an Asset for Share transfer.