On 6 June 2019, the South African Revenue Service (SARS) published Binding Private Ruling 320 (BPR 320), which deals with the income tax, value-added tax (VAT), transfer duty and securities transfer tax (STT) consequences, where an unincorporated universitas is converted to a newly formed private company. BPR 320 also deals with matters related to the conversion.
BPR 320 is quite lengthy and therefore the purpose of this article is not to provide a detailed discussion of the ruling, but to only refer to some of the interesting issues addressed in the ruling.
Roll-over relief in terms of an amalgamation transaction and related tax relief
In terms of s44(1)(a) of the Income Tax Act, No 58 of 1962 (Act), an amalgamation transaction means any transaction −
- in terms of which any company (amalgamated company) which is a resident disposes of all of its assets (excluding certain assets referred to below) to another company (resultant company) which is a resident, by means of an amalgamation, conversion or merger; and
- as a result of which the existence of that amalgamated company will be terminated.
One should note that in concluding the amalgamation transaction, the amalgamated company need not dispose of assets it chooses to use to settle any debts incurred by it in the ordinary course of its trade, or assets required to satisfy any reasonably anticipated liabilities to any sphere of government of any country and costs of administration leading to liquidation or winding-up.
If the above requirements are met and a capital asset is disposed of in terms of the amalgamation transaction, the amalgamated company will qualify for rollover relief if on the date of disposal, the market value of the asset is higher than its base cost. One of the consequences of the rollover relief is that the amalgamated company does not incur a capital gains tax (CGT) liability as a result of the disposal. Instead, the resultant company steps into the shoes of the amalgamated company in respect of the asset disposed of and a CGT liability is only incurred when the resultant company disposes of the asset. The CGT liability is therefore deferred or rolled-over until the resultant company disposes of the asset.
Where a transaction meets the requirements of s44 of the Act, it is also possible to qualify for tax relief in respect of VAT, transfer duty and STT. In order to qualify for relief in respect of these taxes pursuant to the amalgamation transaction, the provisions of the VAT, transfer duty and STT legislation also need to be met.
Facts of BPR 320
The relevant facts are as follows:
- The applicant in BPR 320 is an unincorporated universitas that is a resident (Applicant);
- It intends to convert to a company using the provisions of s44 of the Act. To this end, the following transaction steps will be implemented:
- The Applicant will incorporate another company (Newco) as a subsidiary and subscribe for one share (Incorporation Share) at a nominal amount;
- It will transfer its business assets (including the contracts) as a going concern to Newco, in exchange for an issue of 32 shares by Newco (Consideration Shares) and the assumption of the Applicant’s liabilities by Newco;
- To the extent that capital assets, allowance assets and trading stock are transferred by the Applicant to Newco, they will not change their usage and will be acquired by Newco as capital assets, allowance assets and trading stock;
- Newco will buy back the Incorporation Share for a nominal amount;
- The 32 Consideration Shares will be distributed by the Applicant to the 32 clubs that are members of the Applicant immediately before the proposed transaction takes place; and
- The Applicant’s existence will be terminated;
- The Applicant, which consists of two leagues, is organised in ascending tiers, whereby 16 clubs compete in a higher league and 16 clubs compete in a lower league;
- The Applicant qualifies as a universitas in that it is a separate legal entity that has perpetual succession, existence independent from that of its members, the capacity to own property and the right to sue and be sued in its own name;
- The Applicant constitutes a “company”, as defined in s1 of the Act by virtue of paragraph (d) of the definition of “company”, which includes any “association… formed in the Republic to serve a specified purpose, beneficial to the public or a section of the public…”
- The Applicant currently pays income tax at the corporate rate and is also a registered VAT vendor;
- It pays monthly grants and preparation fees to its 32 member clubs for services rendered by the clubs, which services include participation by the clubs in league matches. The Applicant accounts for VAT on the amounts paid to member clubs; and
- It is intended that Newco will continue the business of the Applicant seamlessly after the implementation of the proposed conversion. To this end, Newco’s draft Memorandum of Incorporation contains certain limitations, including restrictions on the transferability of its shares, which shares may not be transferred without approval in terms of a board resolution.
Subject to certain conditions and assumptions SARS ruled, among other things, that −
- the proposed transaction will qualify as an “amalgamation transaction” as defined in paragraph (a) of the definition of that term in s44(1) of the Act;
- the Applicant may disregard, for purposes of determining its taxable income or assessed losses, the disposal of the Consideration Shares in Newco to the current 32 clubs, in terms of s44(8) of the Act;
- the Applicant will be regarded as having taken the necessary steps to terminate its corporate existence as required by the definition of an “amalgamation transaction” in s44(1), read with s44(13) and s41(4) of the Act, provided that −
- it passes a special resolution authorising its dissolution as envisaged in its founding document;
- it submits copies of the aforementioned resolution to SARS;
- all returns or information required to be submitted or furnished to SARS in terms of any Act administered by SARS, by the end of the relevant period within which the aforementioned steps must be taken, are submitted, or arrangements are made to the satisfaction of SARS for the submission of any outstanding returns or information; and
- the aforementioned steps are taken within 36 months of the date of the proposed transaction, or within such further period as SARS may allow;
- no donations tax, VAT, transfer duty or STT will be payable pursuant to the amalgamation transaction; and
- the monthly grants and fees paid by Newco to the 32 clubs will constitute “gross income”, as defined in s1(1) of the Act, in the hands of the clubs. It will accrue to them when the relevant resolution to pay is made.
One of the interesting aspects of BPR 320, is that it involves an entity that is not a company in terms of the Companies Act, No 71 of 2008 (Companies Act), which is a party to an amalgamation transaction and qualifies for rollover relief. BPR 320 suggests that, where an entity is a “company”, as defined in s1(1) of the Act, but not a company in terms of the Companies Act, it can potentially qualify for rollover relief, provided the requirements of the relevant rollover relief provision, such as s44 of the Act, are met.