On 11 April 2017, the South African Revenue Service (SARS) issued a new Binding Private Ruling (BPR 270) setting out the tax consequences of a restructuring of the unlisted property portfolio of a long-term insurer in terms of s42 of the Income Tax Act, No 58 of 1962 (ITA).

BPR 270 considered the application of sections 25BB(4) (the taxation of Real Estate Investment Trusts (REITs)), 29A (the taxation of long-term insurers), 40CA (the acquisition of assets in exchange for shares or debt issued) and 42 (asset-for-share transactions) of the ITA and paragraph 20(1)(a) of the Eighth Schedule to the ITA (base cost of assets) to the facts in question. It further ruled on the application of s9(1)(l)(i) of the Transfer Duty Act, No 40 of 1949 (TDA) (exemptions from transfer duty) to the facts.

The parties to the transaction were as follows:

  • The applicant is a listed company incorporated and resident in South Africa (Applicant). The Applicant carries on business as a long-term insurer.
  • The first co-applicant is a company incorporated and resident in South Africa and is 100% owned by the Applicant (First Co-Applicant).
  • The second co-applicant is a corporate REIT to be listed on the Main Board of the Johannesburg Stock Exchange (Second Co-Applicant).

The background to the transaction was as follows: 

The Applicant held unlisted prime real estate with the objective of delivering long-term returns and matching policyholder liabilities. The Applicant owned a 100% undivided interest in certain of the properties and less than 100% in the others. The First Co-Applicant owned a 25% undivided interest in a property described as ‘Property X’. 

The Applicant’s funds established and maintained in accordance with s29A of the ITA exposed to the property portfolio were:

  • the untaxed policyholder fund;
  • the individual policyholder fund;
  • the risk policy fund; and
  • the company policyholder fund.

The Applicant and the First Co-Applicant proposed to transfer a portion of their undivided interests in the property portfolio and Property X respectively to the Second Co-Applicant. The proposed transaction steps were as follows: 

  •  The Applicant would dispose of a portion of its undivided interest in the property portfolio, which included associated letting enterprises, to the Second Co-Applicant in exchange for units in the Second Co-Applicant (the REIT).
  • As the Applicant and Second Co-Applicant would become co-owners of the property portfolio they would, in instances where they own a 100% undivided interest in properties, create a separate unincorporated joint venture for purposes of conducting the letting enterprises of the property portfolio.
  •  The First Co-Applicant would dispose of a portion of its undivided interest in Property X, including the associated letting enterprise, to the Second Co-Applicant in exchange for units in the Second Co-Applicant.
  • As the Second Co-Applicant would become a co-owner of Property X, the Second Co-Applicant would be integrated into the pre-existing unincorporated joint venture for purposes of conducting the letting enterprise of Property X.
  • The units in the Second Co-Applicant would be proportionally allocated by the Applicant to the relevant funds in accordance with s29A of the ITA.

The First Co-Applicant had not claimed any of the allowances referred to in s25BB(4) of the ITA prior to the proposed transfer of a portion of its undivided interest in Property X to the Second Co-Applicant.

SARS issued the following ruling in connection with the proposed transaction: 

  •  The disposal of the portion of the undivided interest in the property portfolio (including the rights attaching to the property portfolio and the letting enterprises) by the Applicant to the Second Co-Applicant will qualify as an “asset-for-share transaction” as defined in paragraph (a) of that definition in s42(1) of the ITA. However, s42 will not apply insofar as it relates to the untaxed policyholder fund.
  • Insofar as the disposal of the portion of the undivided interest in the property portfolio relates to the untaxed policyholder fund, the Second Co-Applicant will obtain a base cost for the relevant portion of the undivided interest in the property portfolio (including the relevant portion of the rights attaching to the property portfolio and the letting enterprises) equal to the market value of the Second Co-Applicant’s units issued to the Applicant immediately after acquiring the portion of the undivided interest in the property portfolio.
  •  Insofar as the disposal of the portion of the undivided interest in the property portfolio relates to the untaxed policyholder fund, the Applicant will obtain a base cost for the units acquired in the Second Co-Applicant equal to the market value of the relevant portion of the undivided interest in the property portfolio (including the relevant portion of the rights attaching to the property portfolio and the letting enterprises) disposed of.
  •  The Second Co-Applicant will not be liable for transfer duty as s9(1)(l)(i) of the TDA (which exempts a company acquiring property in terms of an asset-for-share transaction in terms of s42 of the ITA from transfer duty) will apply to the acquisition of the portion of the undivided interest of the Applicant in the property portfolio. However, the public officer of the Second Co-Applicant must make a sworn affidavit or solemn affirmation confirming that the transaction complies with the section.
  • The disposal of the portion of the undivided interest in Property X (including the rights attaching to the property and the associated letting enterprise) by the First Co-Applicant to the Second Co-Applicant will qualify as an “asset-for-share transaction” as defined in paragraph (a) of the definition of “asset-for-share transaction” in s42(1) of the ITA.
  • The Second Co-Applicant will not be liable for transfer duty as s9(1)(l)(i) of the TDA will apply to the acquisition of the portion of the undivided interest of the First Co-Applicant in Property X. However, the public officer of the Second Co-Applicant must make a sworn affidavit or solemn affirmation confirming that the transaction complies with the section.

BPR 270 is valid for a period of two years from 29 March 2017.