With the introduction of the Companies Act No. 71 of 2008 with effect from 1 May 2011, South African companies may convert their existing par value shares into no par value shares. Does this voluntary conversion trigger a „disposal‟ of an „asset‟ for capital gains tax (“CGT”) purposes and thereby give rise to a liability for CGT in the hands of the shareholder?
In terms of the Eighth Schedule to the Income Tax Act, 1962 (“the 8th Schedule”), an „asset‟ is widely defined and includes a right or interest of whatever nature to or in moveable, immovable, corporeal and incorporeal property. In Standard Bank of South Africa Ltd & another v Ocean Commodities Inc & others Corbett JA stated that “a share in a company consists of a bundle, or conglomerate, of personal rights entitling the holder thereof to a certain interest in the company, its assets and dividends”. Accordingly, from a shareholder‟s perspective the rights attaching to a share include the right to vote, the right to dividends and the right to participate in the winding up of a company.
If there is a „disposal‟ of any of these rights attaching to a share, a CGT event will take place, which could potentially result in tax liability in the hands of the shareholder. A „disposal‟ is also widely defined and includes any disposal of an asset including, inter alia, a variation, conversion or exchange of an asset. In terms of Issue 3 of the Comprehensive Guide to Capital Gains Tax:
- the word „variation‟ must be interpreted in the context of the disposal of an asset, i.e. the principle is that a person must have disposed of an asset in the sense of having parted with the whole or a portion of it;
- a conversion involves a substantive change in the rights attaching to an asset; and
- an exchange of an asset is similar to a barter transaction, it requires disposing of one asset in exchange for another.
The key question is, therefore, whether there is a difference between the rights of the par value shares and the rights of the no par value shares once converted. If there is no difference, or if there is no substantive difference or change in the rights, there will be no „disposal‟ for CGT purposes.
It should be possible to ensure that the rights of the no par value shares are the same as the rights of the par value shares, the conversion from a par value share to a no par value share should not result in a variation, conversion or exchange as contemplated by the 8th Schedule. It is important to distinguish between the rights attaching to the share and the contractual rights of the shareholders. A voluntary conversion from par value shares to no par value shares would not necessarily change these contractual rights, and any variation to the contractual rights would need to be considered and evaluated separately.