Cross issue of shares
01 March 2013
Posted by: Erich Bell
24B of the Act was initially introduced to deal with the acquisition of assets
through the issue of shares. Pursuant to the judgment of CIR v Labat Africa
Limited 72 SATC 75 a company would ordinarily not incur expenditure in
connection with the issue of its own shares and thus the need for s24B.
Section 24B of the Income Tax Act was recently amended to only deal with the
issue of shares in exchange to the issue of shares (i.e. the cross-issue of
shares), being an "anti-avoidance" provision.
24B(2) of the Income Tax Act provides that if a company acquires shares
that are issued to that company " directly or indirectly in exchange
for shares issued by that company ", that company incurs no expenditure
for the acquisition of the shares issued to it. As a result, the
subsequent disposal of the shares by the company may trigger a significant tax
liability (i.e. the tax liability being determined with no tax base).
have recognised that this anti-avoidance rule is impractical in South
Africa, because cross-issues are a common feature of many commercially
driven share schemes (especially involving black economic empowerment
(BEE) parties). For instance, many BEE transactions were implemented on the
basis that the empowerment company (BEE CO) would issue preference shares
in the empowered company (OPCO) and use the subscription price thereof to
subscribe for ordinary shares in OPCO. Section 24B(2) of the Income Tax Act had
the effect that the shares in OPCO would have no base cost, triggering
significant adverse tax implications for BEE CO on the disposal thereof.
It will be a welcome relief to taxpayers and
advisers alike that the proposal by National Treasury is for these
anti-avoidance rules to be reworked. The zero base cost rule will either be
eliminated or narrowed. In addition, cross-issues (and
share-for-share-transactions) acting as a mechanism to indirectly shift value
into tax exempt hands will trigger immediate taxation.
Lewis, Senior Associate at Cliffe Dekker Hofmeyr