Generally, donations tax is triggered where a person makes a gratuitous disposal of property. Where BEE transactions are concerned, property (eg. shares) is often disposed of at a value below market value. In such cases there are usually good arguments to be made that the disposal is not gratuitous because some indirect commercial benefit will accrue to the person disposing of the property – it makes “business sense” to participate in BEE initiatives. However, section 58(1) of the Income Tax Act provides that where any property is disposed of for a consideration which, in the opinion of the Commissioner, is not an adequate consideration, that property will be deemed to have been disposed of under a donation and the transaction will trigger donations tax.
This section implies that, even where a disposal of property is not gratuitous, the transaction may trigger donations tax if the Commissioner believes that the consideration is not adequate. It is important to note that should the Commissioner decide that the consideration is not adequate, the decision as such cannot be subject to objection and appeal, but may be taken on review. However, the amount of donations tax may be subject to objection and appeal.
In Binding Private Ruling No. 95 a company and a BEE party applied to the Commissioner for a ruling as to whether the sale of shares in respect of a proposed funding structure will be deemed to be a donation in terms of section 58(1) ie. whether the consideration for the shares will be adequate.
The proposed transaction is as follows:
A special purpose vehicle (SPV) will be established and funded by the company and the BEE party. The company will subscribe for redeemable cumulative fixed term preference shares and ordinary shares (at par) in the SPV. The BEE party will provide nominal funding by also subscribing for certain shares in the SPV. The company will sell its ordinary shares in the SPV on the expiry of the funding term of the preference shares and the BEE party will have first right of refusal in respect of those ordinary shares. If the company has reached its target economic return by means of the return generated by the preference shares, it will sell the ordinary shares at par. If not, it will sell the ordinary shares at a value sufficient to make up for the balance of the target economic return not yet earned.
It was ruled that the consideration for the ordinary shares in terms of the proposed transaction will be adequate and the shares will not be deemed to have been disposed of under a donation.
As pointed out, in BEE transactions shares are often disposed of at a value below the market value. The ruling suggests that where a company has reached its target return in terms of a BEE transaction, disposing of the shares at par value (which will conceivably be below the market value) will constitute adequate consideration.