Proposed amendment


Section 42 of the Income Tax Act (58/1962) provides for tax rollover relief in respect of asset-for-share transactions. Such a transaction generally occurs when a party disposes of an asset to a company, which then issues new shares to the party in return.

One of the requirements for relief is that the nature of the asset be retained. In other words, if the party held the asset as trading stock, the company must acquire it as trading stock; and if the party held it as a capital asset, the company must acquire it as a capital asset (however, in the case of capital assets, the company may acquire them as trading stock if the party and the company are not part of the same group of companies).

However, asset-for-share transactions can create the opportunity for a party holding assets as trading stock to dispose of them to a company by way of an asset-for-share transaction and subsequently sell the shares as capital assets.

To prevent such abuse, Section 42(5) contains an anti-avoidance provision. A party will be deemed to have disposed of its shares as trading stock in the following situation:

  • The party disposes of any share received in terms of an asset-for-share transaction within 18 months of the date of acquisition; and
  • Immediately before such disposal, more than 50% of the market value of all assets disposed of to the company by that party is attributable to allowance assets or trading stock.

The deeming provision operates only to the extent that the amount received by the party for disposal of the shares is less than or equal to the market value of the shares at the beginning of the 18-month period. In other words, the disposal will be deemed to be on revenue account, but only up to the amount of the market value of the shares at the beginning of the 18-month period. If the party receives more than that in return for the disposal of the shares, the normal rules will apply in respect of determining whether the disposal is on revenue or capital account.

The restriction does not apply to the disposal of a share by means of:

  • an intra-group transaction under Section 45;
  • an unbundling transaction under Section 46;
  • a liquidation distribution under Section 47;
  • an involuntary disposal under Paragraph 65 of Schedule Eight; or
  • the death of the party.

An amalgamation transaction in terms of Section 44 is not excluded. However, in Binding Private Ruling 159, the South African Revenue Service ruled that, based on the particular facts at hand, shares acquired in terms of a Section 42 transaction could be disposed of by way of a Section 44 amalgamation transaction and would be deemed to be on capital account (not revenue account).

Proposed amendment

The National Treasury recently released the draft Taxation Laws Amendment Bill 2015. One of the proposed amendments concerns the clarification of Section 42(5) of the Income Tax Act, on the basis that the current wording "creates unintended anomalies and potentially converts the nature of the equity shares to assets held as trading stock".

It is proposed that, instead of formulating the anti-avoidance provisions as a deeming provision (whereby the party is deemed to dispose of shares as trading stock), the party will rather be directly obliged to include the relevant consideration in income. The inclusion in income will therefore not be as a result of the shares being deemed to be trading stock, which could have caused confusion considering accompanying transactions.

The restriction contained in Section 42(5) should be read together with the requirement that the party retain a qualifying interest in the company for at least 18 months. The consequences of not doing so are described in Section 42(6). Although it is possible to dispose of the shares received within 18 months of the implementation of the transaction without Section 42(5) necessarily applying (eg, if less than 50% of the value of the assets is attributable to trading stock), the party doing so should take care not to dispose of so many shares as would negate its qualifying interest in the company.

For further information on this topic please contact Heinrich Louw at DLA Cliffe Dekker Hofmeyr by telephone (+27 11 562 1000) or email ( The DLA Cliffe Dekker Hofmeyr website can be accessed at

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.