As people and businesses evolve, so must their encompassing structures. Companies may need to be introduced into a group, assets ring-fenced for risk purposes, subsidiaries consolidated, or dormant entities wound up. In family-owned groups, trusts are frequently incorporated to hold shares for estate planning, succession and asset protection, while the underlying companies continue trading and familial relationships change.
The difficulty lies in that, under ordinary tax principles, transferring assets or shares between entities can trigger tax, even where no money changes hands.
To address this, the Income Tax Act contains a set of corporate rollover provisions that allow certain restructurings to occur on a tax-deferred (rather than tax-exempt) basis. In essence, the acquiring entity steps into the shoes of the transferring entity, and the underlying tax consequences of the transaction only arise when that asset is ultimately transferred on.
Section 42 (asset-for-share transactions) allows a person, trust, or company to transfer assets to an acquiring company in exchange for its shares without triggering immediate capital gains tax.
Relief is, however, subject to anti-avoidance provisions, such as that the transferor is required to retain 10% voting rights in the acquiring company for at least 18 months after transfer, and that such relief does not automatically exempt the transaction from transfer duty or VAT.
Section 44 governs amalgamations and mergers, permitting one company to absorb another on a similar rollover basis, and is particularly useful when consolidating group entities to streamline operations.
Section 45 permits tax-deferred transfers of assets between companies of the same “group”, for example, where a subsidiary transfers assets to its controlling company (holding at least 70% of its equity shares).
Section 47 similarly allows assets to be distributed from a subsidiary to its holding company, but is specifically relevant in the course of liquidation or deregistration proceedings, enabling groups to simplify their structures without immediate tax cost.
The Companies Act and Commercial Substance
Transfers of all or the greater part of a company’s assets, and financial assistance within groups, are further subject to stricter provisions in terms of the Companies Act 71 of 2008, which must be assessed and complied with prior to proceeding in terms of the above.
Overall, every restructuring must have a genuine commercial rationale, favouring substance over form. SARS closely scrutinises transactions that appear primarily tax-driven, and legislation contains strict clawback provisions if group provisions are misappropriated.
When properly structured, these provisions provide flexibility for corporate and family groups to integrate and reorganise trusts, assets and companies within their ownership structures, manage risk, and plan succession, without triggering immediate and unnecessary tax exposure.
Our corporate and commercial team is well-placed to assist with the structuring, drafting and implementation of group reorganisations to ensure full compliance with applicable legal requirements, and to prevent any costly surprises down the line.
Should you require assistance, please do not hesitate to contact james@caf.co.za or elizabeth@caf.co.za.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).