Conversion of par value shares to no par value shares: substitutive share-for-share transactions
23 July 2012
Posted by: SAIT Technical
By Danielle le Roux (DLA Cliffe Dekker Hofmeyr Tax Alert)
In a recent binding class ruling regarding the conversion of ordinary par value shares to no par value shares, as directed under item 6 of Schedule 5, read with Regulation 31 of the Companies Act, No 71 of 2008 (Companies Act), SARS ruled that there will be "no disposal" on conversion for the shareholders as contemplated in paragraph 11(1)(a) of the Eighth Schedule to the Income Tax Act, No 58 of 1962 (Act). SARS further ruled that there will be no 'receipt' or 'accrual' for the shareholders under the definition of gross income in s1 of the Act, provided the converted shares are held on revenue account. Finally, the ruling provided that the conversion will not be a 'transfer' under s1 of the Securities Transfer Tax Act, No 25 of 2007. This ruling was obtained subject to the rights relating to the Applicant's shares remaining unchanged, as envisaged by item 6 of Regulation 31 of the Companies Act.
The draft Taxation Laws Amendment Bill, 2012 also proposes to insert provisions regulating, among others, the mandatory conversion of par value shares to shares of no par value as required under the Companies Act. These provisions are to be inserted under s43 of the Act. The rationale behind these provisions is that current rollover relief for recapitalisations is too narrow and not in line with the reorganisation rules, as the relief does not currently apply to shares held as trading stock and the permissible types are share consideration are too narrow, not making provision for share splits, consolidations or conversions. The change is also necessitated by the removal of par value shares under the Companies Act.
Under the proposed s43, the required conversion of shares under the Companies Act will fall under the definition of a "substitutive share-for-share transaction" and will not be treated as a deemed disposal event, the base cost remaining the same.
With the introduction of s43, taxpayers will no longer be advised to apply for a ruling regarding the consequences of a conversion of shares in terms of the Companies Act, as the tax consequences will be regulated by s43, should the draft provision be enacted.