News › Weekly Alert Article
Asset for share transactions - tax neutral or not?
A new trend can be seen where larger South African mining companies are divesting their South African mining assets and smaller South African mining companies are merging their respective South African mining assets. The method in which the mergers and/or divesting transactions are structured often involves a transaction whereby an asset is acquired in exchange for shares in the acquiring company. Taxand South Africa discusses how amendments to the Income Tax Act may affect how these mining companies operate.
Transaction structures such as these often allow companies to transact on a tax neutral basis. By using the roll-over provisions provided for in the Income Tax Act, companies believe they are failsafe and have become complacent about potential pitfalls arising from amendments to the Income Tax Act. One such amendment was the introduction of section 24BA, which was inserted into the Act by the Taxation Laws Amendment Act of 2012. What many companies are not aware of is that an asset-for-share transaction is subject to the provisions of section 24BA.
The purpose of section 24BA is an anti-avoidance provision to address potential value shifting arrangements arising in the context of asset for share transactions. In essence, this section provides for the event where there is a mismatch in the value of the asset received and the value of the shares issued as consideration. In this instance, the company acquiring the asset would recognise a capital gain equal to the amount by which the value of the asset exceeds the value of the shares while the company receiving shares would be required to reduce the base cost in such shares with the same amount. For example, where Company A disposes of an asset with a market value of R100 to Company B, and Company B provides Company A with shares with a market value of R90, Company B would recognise a capital gain of R10 while Company A would reduce its base cost in the shares of Company B with R10.
In order not to fall into the pitfalls of section 24BA, it is imperative that, even in the context of a group roll-over provision, a transaction is concluded on a value for value basis. It is further imperative to note that the provisions of section 24BA are based on the market value of the assets before the transaction and the market value of the shares issued after the transaction. As such, a valuation of both components would be required to satisfy oneself that the requirements of section 24BA are complied with.
Also published in Thomson Reuters' Taxnet Pro, 31 October 2013
It is recommended that, where companies have any uncertainty as to whether an envisaged transaction would be subject to section 24BA, the advice of a tax practitioner be sought. This would also make the company eligible for the potential remittance of understatement penalties imposed by SARS under the Tax Administration Act 28 of 2011 (the Tax Admin Act) as, by obtaining an opinion from a registered tax practitioner, the company would meet the requirements of section 223 of the Tax Admin Act provided that the remainder of the requirements of section 223 of the Tax Admin Act are also adhered to.