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Will there be CGT on the sale of your shares to a company owned by your trust?

03 March 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: The taxpayer who initially owned 100 per cent of the shares in his company sold 50 per cent of this share to another company for R3 million. The shareholding at that point was the taxpayer owned 50 per cent; while the other company owned the other 50 per cent. The taxpayer now wants to transfer his share to a new company at a cost of R3.1 million. The new company is wholly owned by the taxpayer's trust. Will the transfer of R3.1 million to the new entity have a capital gains tax implication for him personally?

A: The disposal of the 50 per cent share by the shareholder to a company in which he owns all the shares is still a disposal for the purposes of paragraph 11 of the Eighth Schedule to the Income Tax Act. As the disposal is to a connected party, the proceeds will, in terms of para 38, be deemed to be at market value. Therefore to the extent that the proceeds of R3.1 million do not represent market value, the proceeds would be adjusted.

To achieve a similar result without incurring an immediate CGT liability, you should consider whether section 42 ITA (asset for share transaction) is applicable and appropriate for the transaction. In such a transaction the NewCo will issue shares (even additional shares to the 100 per cent already owned) in exchange for the 50 per cent shares in OldCo.

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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