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Income Tax Act, 1962 (Act 58 of 1962)

Chapter II: The Taxes

PART III: Special rules relating to asset-for-share transactions, substitutive share-for-share transactions, amalgamation transactions, intra-group transactions, unbundling transactions and liquidation distributions

42. Asset-for-share transactions

 

(1)        For the purposes of this section—

 

‘asset-for-share transaction’ means any transaction –

(a)        

(i) in terms of which a person disposes of an asset, (other than an asset which constitutes a restraint of trade or personal goodwill), the market value of which is equal to or exceeds –
(aa) in the case of an asset held as a capital asset, the base cost of that asset on the date of that disposal; or
(bb) in the case of an asset held as trading stock, the amount taken into account in respect of that asset in terms of section 11(a) or 22(1) or (2),

to a company which is a resident, in exchange for the issue of an equity share in that company and that person—

(A) at the close of the day on which that asset is disposed of, holds a qualifying interest in that company or
(B) is a natural person who will be engaged on a full-time basis in the business of that company, or a controlled group company in relation to that company, of rendering a service; and

(ii)        as a result of which that company acquires that asset from that person –

(aa)        as trading stock, where that person holds it as trading stock;

(bb) as a capital asset, where that person holds it as a capital asset; or
(cc) as trading stock, where that person holds it as a capital asset and that company and that person do not form part of the same group of companies:

Provided that this subparagraph does not apply in respect of any transaction which meets the requirements of subparagraph (i) in terms of which a person disposes of—

(i) an equity share in a listed company or in a portfolio of a collective investment scheme in securities or in a portfolio of a hedge fund collective investment scheme to any other company and after that disposal, together with any other transaction that is concluded—

(aa)        on the same terms as that transaction; and

(bb)        within a period of 90 days after that disposal,

that other company holds—

(A) at least 35 per cent of the equity shares of that listed company or portfolio; or
(B) at least 25 per cent of the equity shares of that listed company or portfolio if no person other than that other company holds an equal or greater amount of equity shares in the listed company or portfolio; or
(ii) an asset to a portfolio of a hedge fund collective investment scheme; or

[Proviso amended by section 62(1)(a) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

(b) in terms of which a person that is a company disposes of an asset that constitutes an equity share held by that person in a foreign company as a capital asset, the market value of which is equal to or exceeds the base cost of that equity share on the date of that disposal, to another foreign company in exchange for the issue of an equity share in that other foreign company and—
(i) immediately before the asset is disposed of in terms of that transaction—
(aa) that person and the other foreign company form part of the same group of companies (as defined in section 1); and
(bb) the other foreign company is a controlled foreign company in relation to any company that is a resident and that forms part of that group of companies; and
(ii) at the close of the day on which the asset is disposed of in terms of that transaction—
(aa) more than 50 per cent of the equity shares in the foreign company are directly or indirectly held by a resident (whether alone or together with any company forming part of the same group of companies as that resident); or
(bb) at least 70 per cent of the equity shares in that other foreign company are directly or indirectly held by a resident (whether alone or together with any other company forming part of the same group of companies as that resident);

 

'qualifying interest' of a person means—

(a) an equity share held by that person in a company which is a listed company or will become a listed company within 12 months after the transaction as a result of which that person holds that share;
(b) an equity share held by that person in a portfolio of a collective investment scheme in securities;
(c) equity shares held by that person in a company that constitute at least 10 per cent of the equity shares and that confer at least 10 per cent of the voting rights in that company; or
(d) an equity share held by that person in a company which forms part of the same group of companies as that person.
(e) any equity share held in a portfolio of a hedge fund collective investment scheme.

[Definition amended by section 62(1)(b) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

(2) Subject to subsections (4) and (8), where a person disposes of an asset to a company in terms of an asset-for-share transaction –

(a)        that person must be deemed to have –

(i)        disposed of that asset—

(aa) in the case of an asset-for-share transaction contemplated in paragraph (a) of the definition of ‘asset-for-share transaction’ for an amount equal to the amount contemplated in item (aa) or (bb) of subparagraph (i) of that paragraph, as the case may be; or
(bb) in the case of an asset-for-share transaction contemplated in paragraph (b) of the definition of ‘asset-for-share transaction’, for an amount equal to the base cost of that asset on the date of that disposal; and
(ii) acquired the equity shares in that company on the date that such person acquired that asset (other than for purposes of determining whither a share is a ‘qualifying share’ as defined in section 9C where that asset is not an equity share) and for a cost equal to—
(aa) where that asset is so disposed of as a capital asset, any expenditure in respect of that asset incurred by that person that is allowable in terms of paragraph 20 of the Eighth Schedule and to have incurred such cost at the date of incurral by that person of such expenditure; or
(bb) where that asset is so disposed of as trading stock, the amount taken into account in respect of that aset in terms of section 11(a) or 22(1) or (2),

which cost must, where those equity shares are acquired as –

(A) capital assets, be treated as an expenditure actually incurred and paid by that person in respect of those equity shares for the purposes of paragraph 20 of the Eighth Schedule; and
(B) trading stock, be treated as the amount to be taken into account by that person in respect of those equity shares for the purposes of section 11(a) or 22(1) or (2);

(b)        that person and that company must, for purposes of determining –

(i) any taxable income derived by that company from a trade carried on by it; or
(ii) any capital gain or capital loss in respect of a disposal of that asset by that company,

be deemed to be one and the same person with respect to –

(aa) where that asset is acquired by that company as a capital asset from that person who disposes of it as a capital asset –
(A) the date of acquisition of that asset by that person and the amount and date of incurral by that person of any expenditure in respect of that asset allowable in terms of paragraph 20 of the Eighth Schedule; and
(B) any valuation of that asset effected by that person within the period contemplated in paragraph 29(4) of the Eighth Schedule;
(bb) where that asset is acquired by that company as trading stock from that person who disposes of it as trading stock, the date of acquisition of that asset by that person and the amount and date of incurral by that person of any cost or expenditure incurred in respect of that asset as contemplated in section 11(a) or 22(1) or (2); or
(cc) where that asset is acquired by that company as trading stock from that person who disposes of it as a capital asset –
(A) the date of acquisition of that asset by that person and the amount and date of incurral by that person of any expenditure allowable in terms of paragraph 20 of the Eighth Schedule; or
(B) where that person has valued that asset as contemplated in paragraph 29(4) of the Eighth Schedule, the amount of the market value so determined,

which amount must, notwithstanding paragraph 25 of the Eighth Schedule, be treated as the amount to be taken into account by that company in respect of that asset for purposes of section 11(a) or 22(1) or (2):

Provided that this paragraph does not apply in respect of any asset-for-share transaction in terms of which a person disposes of an equity share in a listed company or in a portfolio of a collective investment scheme in securities to any other company and after that disposal, together with any other asset-for-share transaction that is concluded—

(i) on the same terms as that asset-for-share transaction; and
(ii) within a period of 90 days after that disposal,

that other company holds—

(aa) at least 35 per cent of the equity shares of that listed company or portfolio; or
(bb) at least 25 per cent of the equity shares of that listed company or portfolio if no person other than that other company holds an equal or greater amount of equity shares in the listed company or portfolio.
(bA) [this subparagraph deleted by the Taxation Laws Amendment Act No. 7 of 2010];
(c) any valuation of that asset effected by that person within the period contemplated in paragraph 29(4) of the Eighth Schedule must be deemed to have been effected in respect of the equity shares in that company acquired in terms of that asset-for-share transaction.

 

(3)        Subject to subsection (4) or (8), where a person disposes of –

(a) an asset that constitutes an allowance asset in that person’s hands to a company as part of an asset-for-share transaction and that company acquires that asset as an allowance asset –
(i) no allowance allowed to that person in respect of that asset must be recovered or recouped by that person or included in that person’s income for the year of that transfer; and
(ii) that person and that company must be deemed to be one and the same person for purposes of determining the amount of any allowance or deduction–
(aa) to which that company may be entitled in respect of that asset; or
(bb) that is to be recovered or recouped by or included in the income of that company in respect of that asset;
(b) an asset that constitutes an allowance asset in that person’s hands to a company as part of an asset-for-share transaction and that company acquires that asset as trading stock, no allowance allowed to that person in respect of that asset must be recovered or recouped by that person or included in that person’s income for the year of that transfer; or
(c) a contract to a company as part of a disposal of a business as a going concern in terms of an asset-for-share transaction and an allowance in terms of section 24 or 24C was allowable to that person in respect of that contract for the year preceding that in which that contract is transferred or would have been allowable to that person for the year of that transfer had that contract not been so transferred –
(i) no allowance allowed to that person under those sections must be included in that person’s income for the year of that transfer; and
(ii) that person and that company must be deemed to be one and the same person for purposes of determining the amount of any allowance –
(aa) to which that company may be entitled under those sections; or
(bb) that is to be included in the income of that company under those sections.

[Paragraph (c) amended by section 62(1)(c) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

(3A) For the purposes of the definition of ‘contributed tax capital’, if an asset is disposed of by a person to a company in terms of an asset-for-share transaction contemplated in paragraph (a) of the definition of ‘asset-for-share transaction’ and that person at the close of the day on which that asset is disposed of holds a qualifying interest in that company as contemplated in paragraph (a)(iii) of the definition of ‘qualifying interest’, or is a natural person who will be engaged on a full-time basis in the business of that company or a controlled group company in relation to that company of rendering a service, the amount received by or accrued to the company for the issue of the shares is deemed to be equal to—
(a) if the asset is trading stock, the amount taken into account by that person in respect of the asset in terms of section 11(a) or 22(1) or (2); or
(b) if the asset is an asset other than trading stock, the base cost of that asset determined at the time of that disposal in relation to the person disposing of that asset:

Provided that this subsection does not apply in respect of any asset-for-share transaction in terms of which a person disposes of—

(i) an equity share in a listed company or in a portfolio of a collective investment scheme in securities to any other company and after that disposal, together with any other asset-for-share transaction that is concluded—
(aa) on the same terms as that asset-for-share transaction; and
(bb) within a period of 90 days after that disposal,

that other company holds—

(A) at least 35 per cent of the equity shares of that listed company or portfolio; or
(B) at least 25 per cent of the equity shares of that listed company or portfolio if no person other than that other company holds an equal or greater amount of equity shares in the listed company or portfolio; or
(ii) an asset to a portfolio of a hedge fund collective investment scheme.

[Proviso amended by section 62(1)(d) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

(4)        Where –

(a) a person disposes of an asset to a company in terms of an asset-for-share transaction; and
(b) that person becomes entitled, in exchange for that asset, to any consideration in addition to any equity shares issued by the company to that person,other than any debt assumed by that company as contemplated in subsection (8), the disposal of that asset to that company contemplated in paragraph (a) must, to the extent that any equity shares are issued by the company to that person, be deemed to be a disposal in terms of an asset-for-share transaction for purposes of this section, and to the extent that such person becomes entitled to any other consideration, as contemplated in paragraph (b) be deemed to be a disposal of part of that asset other than in terms of an asset-for-share transaction, in which case the amount to be determined in respect of –
(i) in the case of a disposal of a capital asset, the base cost of that asset at the time of that disposal;
(ii) in the case of a disposal of an allowance asset, the amount of the allowances allowed to that person in respect of that asset; or
(iii) in the case of the disposal of an asset that constitutes trading stock, the amount taken into account in respect of that asset in terms of section 11(a) or 22(1) or (2),

that must be attributed to the part of the asset deemed to have been disposed of other than in terms of an asset-for-share transaction, must bear the same ratio to the respective amounts referred to in subparagraphs (i) to (iii) as the market value of the consideration not consisting of equity shares issued by that company bears to the market value of the total consideration in respect of that asset.

 

(5)        Where a person –

(a) acquired any equity share in a company in terms of an asset-for-share transaction; and
(b) disposes of any such equity share (other than by way of an intra-group transaction contemplated in section 45, an unbundling transaction contemplated in section 46 or a liquidation distribution contemplated in section 47, an involuntary disposal as contemplated in paragraph 65 of the Eighth Schedule or the death of that person) within a period of 18 months after the date of acquisition contemplated in paragraph (a) and immediately prior to that disposal more than 50 per cent of the market value of all the assets disposed of by that person to that company in terms of any transaction in respect of which the provisions of this Part apply, is attributable to allowance assets or trading stock or both,

that person must, to the extent that any amount received by or accrued to that person in respect of the disposal of that share is less than or equal to the market value of that share at the beginning of such period of 18 months, include that amount in that person's income.

[Words following paragraph (b) amended by section 62(1)(e) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

(6)        Where a person—

(a) disposed of an asset to a company in terms of an asset-for-share transaction contemplated in paragraph (a) of the definition of 'asset-for-share transaction' and, within a period of 18 months after the date of that disposal, that person ceases—
(i) to hold a qualifying interest in that company, as contemplated in paragraphs (c) and (d) of the definition of 'qualifying interest' (whether or not as a result of the disposal of shares in that company); or

[Subparagraph (i) amended by section 55(1)(a) of Act No. 43 of 2014]

(ii) to be engaged on a full-time basis in the business of the company, or controlled group company in relation to that company, of rendering the service contemplated in paragraph (a)(i)(B) of the definition of 'asset-for-share transaction' ,

that person is for purposes of subsection (5), section 22 or the Eighth Schedule deemed to have—

(aa) disposed of all the equity shares acquired in terms of that asset-for-share transaction that are still held immediately after that person ceased—

(A)        to hold the qualifying interest contemplated in subparagraph (i); or

(B)        to be engaged as contemplated in subparagraph (ii),

for an amount equal to the market value of those equity shares as at the date of the disposal in terms of the asset-for-share transaction; and

(bb) immediately reacquired all the equity shares contemplated in item (aa) at a cost equal to the amount contemplated in that item:

Provided that this paragraph does not apply where the person ceases to hold a qualifying interest in that company as a result of—

(a) an intra-group transaction contemplated in section 45, an unbundling transaction contemplated in section 46 or a liquidation distribution contemplated in section 47;
(b) an involuntary disposal contemplated in paragraph 65 of the Eighth Schedule or a disposal that would have constituted an involuntary disposal contemplated in that paragraph had that asset not been a financial instrument; or
(c) the death of that person; or
(b) disposed of an equity share in a foreign company to another foreign company in terms of an asset-for-share transaction contemplated in paragraph (b) of the definition of 'asset-for-share transaction' and, at any time within a period of 18 months after the date of that disposal and whether or not as a result of the disposal of shares in that foreign company—
(i) where that asset-for-share transaction was constituted as a result of compliance with the requirement prescribed by paragraph (b)(ii)(aa) of that definition, that requirement is no longer met; or
(ii) where that asset-for-share transaction was constituted as a result of compliance with the requirement prescribed by paragraph (b)(ii)(bb) of that definition, that requirement is no longer met,

that person is for purposes of subsection (5), section 22 or the Eighth Schedule deemed to have—

(aa) disposed of all the equity shares acquired in terms of that asset-for-share transaction that are still held immediately after the applicable requirement is no longer met, for an amount equal to the market value of those equity shares as at the date of the disposal in terms of the asset-for-share transaction; and
(bb) immediately reacquired all the equity shares contemplated in item (aa) at a cost equal to the amount contemplated in that item:

Provided that this paragraph does not apply where any requirement prescribed by paragraph (b)(ii)(aa) or (bb) of the definition of 'asset-for-share transaction' is no longer met as a result of—

(a) an intra-group transaction contemplated in section 45, an unbundling transaction contemplated in section 46 or a liquidation distribution contemplated in section 47; or
(b) an involuntary disposal contemplated in paragraph 65 of the Eighth Schedule or a disposal that would have constituted an involuntary disposal contemplated in that paragraph had that asset not been a financial instrument.

 

(7) Where a company disposes of an asset within a period of 18 months after acquiring that asset in terms of an asset-for-share transaction, and –
(a) that asset constitutes a capital asset, so much of any capital gain determined in respect of the disposal of that asset as does not exceed the amount that would have been determined had that asset been disposed of at the beginning of that period of 18 months for proceeds equal to the market value of that asset as at that date, may not be taken into account in determining any net capital gain or assessed capital loss of that company but is subject to paragraph 10 of the Eighth Schedule for purpose of determining an amount of taxable capital gain derived from that gain, which taxable capital gain may not be set off against any assessed loss or balance of assessed loss of that company; or
(b) that asset constitutes –
(i) trading stock in the hands of that company, other than an asset that constitutes trading stock that is regularly and continuously disposed of by that company, so much of the amount received or accrued in respect of the disposal of that trading stock as does not exceed the market value of that trading stock as at the beginning of that period of 18 months and so much of the amount taken into account in respect of that trading stock in terms of section 11(a) or 22(1) or (2) as is equal to the amount so taken into account in terms of subsection (2)(b); or

[Subparagraph (i) amended by section 55(1)(b) of Act No. 43 of 2014]

(ii) an allowance asset in the hands of that company, so much of any allowance in respect of that asset that is recovered or recouped by or included in the income of that company as a result of that disposal as does not exceed the amount that would have been recovered had that asset been disposed of at the beginning of that period of 18 months for an amount equal to the market valve of that asset as at that date, must be deemed to be attributable to a separate trade carried on by that company, the taxable income from which trade may not be set off against any assessed loss or balance of assessed loss of that company.

 

(8)        Where a person disposes of –

(a) any asset which secures any debt to a company in terms of an asset-for-share transaction and that debt was incurred by that person –

(i)        more than 18 months before that disposal; or

(ii)        within a period of 18 months before that disposal –

(aa) and that debt was incurred at the same time as that asset was acquired by that person; or
(bb) to the extent that debt constitutes the refinancing of any debt in respect of that asset incurred as contemplated in subparagraph (i) or item (aa) of subparagraph (ii),

and that company assumes that debt or an equivalent amount of debt that is secured by that asset; or

(b) any business undertaking as a going concern to a company in terms of an asset-for-share transaction and that disposal includes any amount of any debt that is attributable to, and arose in the normal course of that business undertaking and,

that person must, upon the disposal of any equity share acquired in terms of that asset-for-share transaction and notwithstanding the fact that that person may be liable as surety for the payment of the debt referred to in subparagraphs (a) or (b), treat so much of the face value of that debt as relates to that equity share—

(A) where that equity share is held as a capital asset, as an amount received or accrued in respect of that equity share that accrues to that person in respect of the disposal by that person of that equity share; or
(B) where that equity share is held as trading stock, as income to be included in that person’s income for the year of assessment during which that equity share is disposed of by that person.

 

(8A)        This section does not apply to the disposal of an asset by a person to a company if—

(a)        the person and the company agree in writing that this section does not apply;

(b)        the disposal would not be taken into account for purposes of determining—

(i) any taxable income or assessed loss of that person; or
(ii) any proportional amount of the net income of a controlled foreign company which is included in the income of any resident in terms of section 9D; or

(c)        that asset constitutes a debt owing by or a share in that company.

 

(9)        [Deleted by the Revenue Laws Amendment Act, 2007 (Act No. 35 of 2007)]

 

(10)        [Deleted by Revenue Laws Amendment Act No. 31 of 2005]