Utilising the rollover relief provisions under sections 42 (asset-for-share) and 45 (intra-group transaction) of the Income Tax Act 58 of 1962, Watson Attorneys managed the conveyancing aspects of a two-step corporate restructure, to transfer a Cape Town property (carried at approximately R25 million) from PHC to GHC, with the transaction structured to avoid triggering immediate adverse income tax, CGT, VAT, and transfer duty consequences, while carefully distinguishing between the applicable transfer duty exemption provisions under section 9(1)(l) and section 9(15A) of the Transfer Duty Act 40 of 1949 to prevent unintended tax implications upon implementation.
Watson Attorneys attended on the conveyancing aspect of a two-step corporate restructure involving a foreign holding company (“the Foreign Parent”), domiciled outside the Republic, and two South African resident companies — a Property-Holding Company (“PHC”) and a Group Holding Company (“GHC”). The central object of the restructure is to transfer ownership of an Erf situated in the City of Cape Town (“the Property”) from PHC to GHC, while simultaneously reorganising the group’s shareholding structure. The restructure is to be effected using the rollover relief provisions of sections 42 and 45 of the Income Tax Act 58 of 1962 (“ITA”).
PHC acquired the Property for approximately R13.5 million. Subsequent improvements to the Property cost approximately R11.5 million, bringing the combined carrying value of the Property to approximately R25 million. PHC holds the Property as a capital asset, reflected in its accounts at acquisition cost plus improvements. The acquisition and improvements were funded by a shareholder loan from the Foreign Parent.
Immediately following the Section 42 Asset-for-Share Transaction (Share Transfer), PHC transfers the Property to GHC as a capital asset in terms of an intra-group transaction under section 45 of the ITA. This step is the central conveyancing event of the restructure. Watson Attorneys managed the legal aspects of the transfer, including drafting documents, conducting due diligence, and liaising with banks, municipalities, and the Deeds Office.
Transfer duty is a hard gatekeeper in the transfer process: the transfer cannot be registered at the Deeds Office until SARS has issued the transfer duty receipt (or certified an exemption). This intra-group transfer qualifies for a transfer duty exemption. Relief is subject to a sworn affidavit from the public officer confirming the underlying ITA conditions are met.
Section 9(1)(l) of the Transfer Duty Act 40 of 1949 exempts acquisitions undertaken in terms of asset-for-share (s 42 ITA), substitutive share-for-share (s 43 ITA), amalgamation (s 44 ITA), intra-group (s 45 ITA) and liquidation-distribution (s 47 ITA) transactions. Accordingly, the intra-group transfer of the Property from PHC to GHC is exempt from transfer duty, provided the requirements of section 45 are satisfied and the requisite affidavit is lodged with SARS and at the Deeds Office.
It should be noted that section 9(15A) of the Transfer Duty Act similarly provides for an exemption from transfer duty for the acquisition of property under an asset-for-share transaction, but that exemption requires compliance not only with section 42 of the ITA but also with section 8(25) of the Value Added Tax Act 89 of 1991. The correct exemption provision to apply must be carefully identified. It is important, from a reporting and transactional document drafting perspective, to ensure that the parties clearly differentiate between the applicable provisions, as incorrect recording of the parties’ position may result in unwanted tax implications upon implementation.