New draft Binding General Ruling relating to unbundling transactions
15 April 2015
Posted by: Author: Rozelle van Schaik
van Schaik (BDO)
discussion on the meaning of the phrase "at the end of the day after that
distribution” which is dealt with in a new draft Binding General Ruling
relating to the unbundling of transactions
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 myriad 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
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 binding on SARS and all qualifying taxpayers.
The draft BGR discussed in this article was open for comment until 30 January
2015 and will only become binding once the final version is 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 question of 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
receiving 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 provides otherwise.
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 each other.
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 of 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(s) 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 for the
conclusions arrived at.
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 the March/April 2015 edition on Tax Talk.