The Taxation Laws Amendment Act (22/2012) introduced a new Section 24BA into the Income Tax Act which deals with value mismatches involving the transfer of assets in exchange for the issue of shares.

Essentially, the section applies where the value of the asset given in consideration for the shares issued is different from what it would have been had the transaction been between independent persons acting at arm's length.

Where the market value of the asset before the disposal exceeds the market value of the shares issued, the excess is deemed to be a capital gain for the company issuing the shares. The amount of excess must also be applied to reduce the tax cost of the shares in the hands of the subscriber.

Where the market value of the shares after issue exceeds the market value of the asset given in consideration, the excess is deemed to be a dividend in specie paid by the issuing company.

Notably, Section 40CA of the Income Tax Act provides that where a company has received an asset in return for the issue of shares, it is deemed to have incurred expenditure equal to the market value of the shares immediately after the acquisition.

It is now proposed that some of the anomalies that could arise from the application of these provisions be corrected.

Specifically, where a deemed gain has been triggered due to the application of Section 24BA, and Section 24CA deems the expenditure in respect of the asset to be equal to the market value, double taxation could occur if the asset is subsequently disposed of.

The issue of determining the market value of shares will also be addressed in the case of asset-for-share transactions under Section 42 of the Income Tax Act.

Where an asset is transferred in terms of an asset-for-share transaction, the deferred tax liability in respect of the asset may arguably be considered when determining the market value of the shares.

It is proposed that any difference in the value of the shares due to the deferred tax liability should not be subject to the provisions. However, the seller can still declare a substantial dividend.

For further information on this topic please contact Heinrich Louw at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email (heinrich.louw@cdhlegal.com). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.

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