roll-over: practical considerations
The corporate roll-over provisions contained in sections 41 to 47 of the Income Tax Act, No 58 of 1962, generally allow for the tax-neutral transfer of assets between identified persons. When transactions are concluded in terms of these provisions, the legislature provides for tax-free transfer since the cost history of the disposing party or rolled forward to the receiving party. Any inherent capital gains or income gains will therefore still be taxed, but only when the receiving party ultimately disposes of the asset. These provisions include:
- Asset-for-share transactions;
- Intra-group transactions;
- Unbundling transactions; and
- Liquidation distributions.
A common misconception is that the roll-over provisions override all other tax provisions. This is not the case. Specific exclusions apply where different sections of the Act still apply, and the remainder is only overridden to the extent that it conflicts with the roll-over provisions.
Crucially, these transactions often stand or fall by their implementation, and it is of critical importance that the following practical matters are considered as part of the implementation of the roll-over provisions.
need for formal agreements
In terms of South African law, few agreements must be in writing. The Act contains no specific requirement that the parties have a formal agreement and that the roll-over relief provisions apply automatically. This is unless the parties agree in writing that they should not. From a VAT perspective, an agreement in writing is also required to transfer a going concern. While there is no formal requirement for a written agreement, it becomes challenging for contracting parties to discharge the burden of proof that transactions have been entered into in a specific form. It is therefore strongly recommended that agreements indeed be put in place.
The need for formal valuations
to the requirement for agreements, the Act does not require formal valuations.
However, as was seen in the case of CSARS
v Stepney Investments (Pty) Ltd  ZASCA 138, the valuation of assets becomes very
difficult to prove if there is no support for a position that has been taken
and it is recommended that contracting parties at least document the rationale
for valuations prescribed to assets.
Debt as part of roll-over relief transactions can become complex. Contracting parties must firstly ensure that external financiers such as banks allow for obligations to be transferred (especially where the debts are secured by the assets which are transferred) and, importantly, that the debts proposed to be transferred are “qualifying debts” that qualify to be transferred.
Various provisions of the Companies Act are relevant when dealing with these transactions, amongst others:
- Section 75(4): Personal financial interests of directors
- Section 40: adequate consideration for the issue of shares
- Section 44/45: financial assistance for the issue of shares and intra-group debt
- Section 41: shareholder approval for issuance of shares in certain circumstances
- Section 4: Solvency and liquidity
Non-adherence to some of these provisions may result in transactions being null and void and contracting parties must therefore ensure strict adherence.
What about errors?
Errors in implementation are often encountered. Those errors result from values, the perceived consequence of the transaction, persons involved, and the type of transaction implanted. While rectification is often a remedy (both common law as well as statutory, such as in paragraph 11 of the Eighth Schedule), our courts have previously noted that:
“When a scheme works, no tears are shed for the Commissioner. That is because a taxpayer is entitled to order his affairs so as to pay the minimum of tax. When he arranges them so as to attract more than the minimum he has to grin and bear it.”
It is therefore essential to understand the rights and obligations created through the inaccurate implementation of transactions and whether those can legitimately be reversed.
The Tax Consequences of Corporate Roll-Overs
2023 Catch-up package
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