New draft binding general ruling relating to unbundling transactions
12 February 2015
Posted by: Author: BDO South Africa
Author: BDO South Africa
The Corporate Restructuring Rules (‘the rules') are included in sections 41 to 47 of the Income Tax Act No 58 of 1962 (‘the Act'). The myriads of requirements, conditions and consequences in these sections often present challenges when applying the rules. The South African Revenue Service (‘SARS') recently issued a draft Binding General Ruling (‘BGR') to clarify the meaning of the phrase ‘as at the end of the day after that distribution' as used in section 46(3)(a)(v) of the Act, relating to unbundling transactions.
In terms of section 89 of the Tax Administration Act No 28 of 2011 (‘the TAA'), a senior SARS official may issue a BGR. Section 89 of the TAA lists the requirements with which a BGR needs to comply. The purpose of a BGR is to clarify SARS's application or interpretation of the tax law under consideration. A BGR is, as the name suggests, binding on SARS. The draft BGR discussed in this article is open for comment until 30 January 2015, and will only become binding upon SARS once the final version has been issued by SARS.
Section 46 of the Act provides tax relief to the parties to an unbundling transaction. The words ‘unbundling shares' refer to the shares in the unbundling company held by the shareholder who becomes entitled to the ‘unbundled shares', which are the shares distributed to the shareholder. A portion of the expenditure and market value of the unbundling shares needs to be allocated to the unbundled shares. This allocation must be done in the same ratio that the market value of the unbundled shares ‘as at the end of the day after that distribution' bears to the sum of the market value of the unbundling shares and the unbundled shares.
The draft BGR on the meaning of the phrase ‘at the end of the day after that distribution' essentially deals with the matter when the distribution of the unbundled shares occurs, which it states is generally when the shareholder becomes unconditionally entitled to the distribution.
In terms of section 59(1)(e) of the Companies Act No 71 of 2008 (‘the Companies Act'), the board of directors may set a record date for determining which shareholders are entitled to receive a distribution. In terms of section 59(3) of the Companies Act, if the board of directors did not set a record date, the record date will be the date of the action or event, unless the Memorandum of Incorporation or rules of the company provide otherwise.
The draft BGR states that a distribution occurs when the shareholder becomes unconditionally entitled to the distribution. A shareholder of listed shares becomes unconditionally entitled to a distribution on the first day on which the unbundling and unbundled shares begin trading independently of one another. The aforementioned is also the first business day after the ‘last day to trade' as defined in the JSE Limited Listings Requirements. In terms of the JSE Limited Listing Requirements, the term ‘business day' means any day other than a Saturday, Sunday or any other day on which the JSE is closed, and the phrase ‘last day to trade' means the last business day to trade in a security in order to settle by record date to be able to qualify for entitlements or to participate in an event. In the case of unlisted shares, the facts and circumstances of the particular case need to be considered. Generally, the shareholder of unlisted shares become entitled to a distribution on the date on which the distribution is approved by the board of directors. However, if the board of directors specifies a date on which shareholders have to be registered in the company's share register in order to receive the distribution, it will be that date.
Other than the above reference to the Companies Act, the draft BGR does not cite any authority that supports the conclusions.
In summary, the draft BGR concludes that ‘as at the end of the business day after that distribution' means; in relation to listed shares, the end of the first business day after the ‘last day to trade' and in relation to unlisted shares, the end of the day on which the shareholders became entitled to the distribution.
This article first appeared on bdo.co.za.