||Jéan De Wet|
An asset-for-share transaction can be defined as a transaction whereby a person (“Transferor”) disposes of an asset to a Company and the Company, in turn, issues shares for the asset. Immovable property is often acquired through asset-for-share transactions and the focus of this article is on the possible Transfer Duty implications.
The requirements of asset-for-share transactions are set out in section 42 of the Income Tax Act No. 58 of 1962 (“Income Tax Act”). Parties mostly enter into asset-for-share transactions for the roll-over tax relief that Section 42 provides. These tax benefits are not considered here, and this article is based on the assumption that the section 42 requirements are complied with.
To determine the Transfer Duty implications of asset-for-share transactions the first question is whether the transaction is a VAT transaction, or not. Section 9(15) of the Transfer Duty Act 40 of 1949 (“Transfer Duty Act”) provides that no Transfer Duty shall be payable if the property acquired is a “taxable supply” for the purposes of the Value-Added Tax Act 89 of 1991 (“VAT Act”).
However, section 8(25) of the VAT Act provides that, “where any goods or services are supplied by a vendor to another vendor, those vendors must for purposes of that supply or subsequent supplies of those goods or services, be deemed to be one and the same person provided the provisions of section 42, 44, 45 or 47 of the Income Tax Act are complied with”. This means that the supply in terms of an asset-for-share transaction would be considered as a “non-event” for VAT purposes if the provisions of Section 42 of the Income Tax Act and Section 8(25) of the VAT Act are complied with. It is important to note that Section 8(25) further specifically states that, for this section to be applicable to asset-for-share transactions, the supply must be that of an enterprise (or part thereof) that is disposed of as a going concern.
If Section 8(25) is applicable, it has consequences for the possible payment of Transfer Duty. The supplier and recipient are deemed to be “one and the same person” and consequently, the transaction cannot be viewed as a “taxable supply” for the purposes of the Transfer Duty exemption as provided for in Section 9(15) of the Transfer Duty Act. The liability for Transfer Duty in this situation fell away with the enactment of Section 15(A) of the Transfer Duty Act. This section provides that no Transfer Duty shall be payable in respect of property acquired by means of an asset-for-share transaction, where the supplier and recipient is deemed to be one and the same person in terms of Section 8(25) of the VAT Act. This section is therefore applicable to those transactions that would have constituted VAT transactions, were it not for the application of Section 8(25) of the VAT Act.
If the transaction in question is not a VAT transaction, the more general exemption in Section 9(1)(l)(i) of the Transfer Duty Act is applicable. This section states that, “[n]o duty shall be payable in respect of the acquisition of property by any company in terms of an asset-for-share transaction as defined in section 42 of the Income Tax Act…”
In summary, where parties have entered into an asset-for-share transaction, section 9 of the Transfer Duty Act provides for exemption from Transfer Duty in the following circumstances: Section 9(15) provides exemption if the transaction is a VAT transaction; section 9(15A) provides exemption if the transaction would have constituted a VAT transaction were it not for the application of Section 8(25) of the VAT Act; and section 9(1)(l)(i) provides exemption if the transaction is not a VAT transaction