The ‘corporate rules' set out in Part III of the Income Tax Act provide for the tax neutral transfer of assets in certain circumstances. These rules are particularly beneficial in performing group restructurings and in many cases the absence of these rules would make the tax cost of a group restructuring entirely prohibitive.
One of the key requirements for the relief provided by each of the corporate rules to apply (apart from section 46, unbundling transactions) is that where the transferor holds the asset in question as trading stock, the acquiring company must acquire and hold it as trading stock and similarly that where the transferor holds the asset as a capital asset the acquiring company must acquire and hold it as a capital asset. This requirement is problematic in a group restructuring scenario where a particular capital asset is transferred between multiple companies in back-to-back transactions. This is because the acquisition and immediate disposal of an asset by a company gives a strong indication that the company is dealing with the asset as trading stock.
SARS recently issued a binding private ruling which deals specifically with the back-to-back transfer of a capital asset in terms of the corporate rules. In this particular case it is SARS' view that the company which acquired and immediately disposed of the asset would be seen to have acquired and held the asset on capital account because the facts and circumstances surrounding the transaction indicate that the group as a whole was not dealing with the asset as trading stock. This ruling, though not generally binding, gives some level of comfort that the relief provided by the corporate rules will apply to back-to-back transfers of capital assets provided that the other requirements of the particular section are met.
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