A number of advance tax rulings have recently been released by the South African Revenue Service (SARS) relating to the corporate tax roll- over relief rules contained in s41 to 47 of the Income Tax Act, No 58 of 1962 (Act). The most recent ruling in this regard is Binding Private Ruling No 168 (BPR 168), which was released on 17 April 2014.
The facts in BPR 168 are relatively simple. Company A had acquired assets from company B in exchange for the issue of equity shares in company A in terms of an 'asset-for-share transaction' as defined in s42 of the Act. It was proposed that company A would thereafter dispose of the assets acquired to a group company in terms of an 'intra-group transaction' as defined in s45 of the Act. The disposal would take place within 18 months of the 'asset-for-share transaction'.
The issue that arises is that, generally, when a person (company A) acquires assets in terms of s42 of the Act, there are restrictions imposed on the disposal of those assets within 18 months. The question, which has been debated by taxpayers and tax practitioners for a number of years, is whether this restriction on the disposal of the assets is still applicable where the assets are subsequently disposed of in terms of a further transaction to which one of the corporate tax roll-over rules applies.
If one considers the wording in s42(7) of the Act, it specifically states that where a company disposes of a capital asset within a period of 18 months after acquiring that asset in terms of an 'asset-for- share transaction', all or a portion of the capital gain realised from the disposal of those assets will be ring-fenced and may not be set off against any assessed loss of the acquiring company (company A). S42(7) of the Act does not contain an explicit exemption for the subsequent disposal of those assets in terms of s45 of the Act (or any of the other corporate tax roll-over relief provisions).
It follows that, on a strict interpretation of s42(7) of the Act, it is not possible for company A to subsequently dispose of the assets acquired in terms of an 'asset-for-share transaction' to a group company within 18 months without triggering s42(7) of the Act.
There is further support for this interpretation if one considers that other provisions in s42 of the Act explicitly indicate when it is possible to implement a subsequent corporate transaction without triggering the relevant anti-avoidance provision. For instance, s42(6) of the Act provides that, should a person cease to hold a qualifying interest in the company within 18 months of the 'asset-for-share transaction', any roll-over relief obtained by virtue of s42 of the Act would effectively be reversed. However, s42(6) explicitly indicates that one may cease to hold a qualifying interest if the shares in the company are disposed of (or the qualifying interest lost) as a result of a transaction in terms of s45 (intra-group transaction), s46 (unbundling transaction) or s47 (liquidation distribution) of the Act. There is no express exception in respect of s42 or s44 of the Act (amalgamation transaction).
Despite the plain wording of s42(7) of the Act and the lack of an explicit exemption, it was ruled in BPR 168 that s42(7) will have a 'nil effect' on the disposal of the assets by company A to the group company under s45 notwithstanding the fact that the disposal may take place within 18 months of having been acquired by company A via an 'asset- for-share transaction'.
BPR 168 thus appears to suggest that it is possible to implement subsequent corporate restructurings within 18 months of an 'asset-for-share transaction' in s42 of the Act. In addition, it appears to suggest that one may be entitled to implement multiple s42 transactions.
However, it should be appreciated that binding private rulings are only binding between SARS and the applicant to the ruling. Also, it is not necessarily clear what SARS means when it states that s42(7) of the Act 'will have nil effect' on the disposal of the assets by company A. Does SARS mean that s42(7) is applicable but will have no effect on the taxpayer? Alternatively, does SARS mean that as a result of the application of s45 of the Act, s42(7) of the Act will have a nil effect on the disposal of the assets?
The other interesting ruling made in BPR 168 is that company A will not be subject to tax on any recoupment on the disposal of the assets to the group company, including the recoupment of any allowances claimed by company A and company B in respect of such assets. Where a taxpayer acquires assets and disposes of them within a short period of time or it was always contemplated that the assets will be sold (it was just a question of when), there is risk that these assets may be considered revenue assets and the proceeds from the disposal thereof should be subject to income tax. There may have been some doubt on the part of company A as to whether the disposal of the assets in a relatively short period of time would still qualify for the roll-over relief in s45 of the Act, especially if these assets are no longer considered capital assets or do not constitute trading stock as defined.
Taxpayers and tax practitioners implementing corporate restructurings will be very interested in the rulings made by SARS in BPR 168, as well as binding private ruling 159, which was discussed in our Tax Alert on 31 January 2014. Taxpayers implementing corporate restructurings with multiple transaction steps should pay careful attention to these rulings made by SARS.