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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