January 31, 2020
January 31, 2020

Corporate transactions are a way of everyday life. Asset acquisitions, company acquisitions, mergers, and asset for share transactions are far the more common than one may think. There are, however, always two sides to these types of transactions. The Companies Act deals with the legal and governance requirements for a company to enter into and execute these types of transactions. The Income Tax Act, however, deals with a variety of requirements relating to these transactions, which ultimately ensure that no simulation of the terms of commercial law, and its application are flouted.

On 9 January 2020, the South African Revenue Service (SARS) released Binding Private Ruling 337 in accordance with Sections 78(1) and 87(2) of the Tax Administration Act[1], dealing specifically with amalgamation transactions where no sale price is paid, but liabilities of the target entity are assumed. Amalgamations are dealt with in terms of section 44 of the Income Tax Act. In order to keep the contents thereof concise, only the aspects relating to the binding ruling are discussed.

An amalgamation transaction is defined in section 44(1) the Income Tax Act[2] as a transaction whereby any resident company (the amalgamated company or seller) disposes of all its assets to another resident company (the resultant company or buyer), resulting in the termination of the amalgamated company’s existence.[3]

In this scenario, the Applicant, and three Co-applicants (all resident companies who actively carry on trades) entered into a restructuring, whereby, the assets and liabilities of the Applicant, and Co-applicants one and two, are sold to and acquired by the third Co-applicant. In consideration hereof, Co-applicant three would assume the liabilities of the Applicant, and Co-applicants one and two. The transactions would be merger transactions, and written sale of business agreements would accompany.

Together with the facts above, the assumptions and conditions that this ruling is subject to, were as follows:

  • The debt that the sellers (amalgamated company) would transfer to Co-applicant three, which was incurred in the 18 months preceding the transaction, arose from the ordinary course of business, and is attributable as such;
  • All debt transferred to Co-applicant 3 as part of the transaction was not incurred by each seller respectively, for facilitation, procurement enablement or funding of the transaction;
  • Each seller would take steps proposed in terms of section 41(4) of the Act, to liquidate, deregister or wind up within 36 months of the date of the relevant transaction; and
  • None of the sellers would withdraw any steps in liquidation, winding-up or deregistration, or do anything else to invalidate any such step taken resulting in that it would not be wound up, liquidated or deregistered.

SARS confirmed that the proposed transaction whereby the Applicant and Co-applicant’s 1 and 2 sell assets to Co-applicant 3, constituted an amalgamation transaction as per the definition contained in Section 44(1)(a) of the Act.[4]

Furthermore, the ruling provided that

  • Where the sellers sold assets to Co-applicant 3, there would be a deemed disposal of these assets, equal to the base cost of the asset, on date of disposal. The sellers and Co-applicant 3 are deemed to be one and the same person when calculating the capital gains, should Co-applicant 3 dispose of that asset at a later stage[5];
  • If the assets were held as trading stock by the sellers, the sellers are deemed to have disposed of the assets for an amount equal to the amount taken into account by the seller in terms of general deductions[6] and valuations of trading stock.[7] in respect of the date of acquisition of the assets and the date of incurring any expenditure relating to the sale of the assets. The sellers and Co-applicant 3 are deemed to be one and the same person respectively[8];
  • if any asset was acquired by Co-applicant 3 as an allowance asset, the seller would not be entitled to recovery or recoupment of any allowance or be included in the seller’s income for the year. Again, Co-applicant 3 and the respective sellers are deemed to be one and the same person[9]; and
  • If the seller received an allowance in terms of section 24, 24C or 24P in a preceding year of assessment and so claimed the allowance, but transfer took place in the following year, no allowance should be included in the year of transfer. The respective seller and Company 3 are deemed to be one and the same person when determining the allowance that the resultant company can claim as an allowance, as well as what is to be included in the income of the resultant company.[10]

The Commissioner has stated that this ruling is valid for a period of 5 years from 16 July 2019.

  • [1]              Act 28 of 2011.
  • [2]              Act 58 of 1962.
  • [3]              This is a brief description and has been isolated from sections 44(1)(b) and 44(1)(c) dealing with foreign entities.
  • [4]              The Income Tax Act 58 of 1962.
  • [5]              Sec44(2) of The Income Tax Act 58 of 1962.
  • [6]              Sec11a of The Income Tax Act 58 of 1962.
  • [7]              Sec22 of The Income Tax Act 58 of 1962.
  • [8]              Sec44(2) of The Income Tax Act 58 of 1962.
  • [9]              Sec44(3) of The Income Tax Act 58 of 1962.
  • [10]             Sec44(3) of The Income Tax Act 58 of 1962.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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