| In recent times South Africa’s mining industry has been subject to much uncertainty which contributed towards the fall in share prices, decrease in offshore investor confidence and which also gave rise to a weaker Rand. Much of the uncertainty can be ascribed to the numerous strikes within the various mining industries. Late leader of the Civil Rights movement and American politician, Barbara Jordan, once said “for all of its uncertainty, we cannot flee the future.” With this in mind South African mining companies are, even with all the uncertainty in the market, adapting to the future by making calculated decisions with regard to their strategic mining assets.
What can be seen is a trend towards larger South African mining companies divesting of their South African mining assets as well as smaller South African mining companies merging their respective South African mining assets. A number of these mergers further occur in order to comply with South Africa’s Black Economic Empowerment (“BEE”) requirements. The method in which the mergers and/or divesting transactions are structured often involves a transaction whereby an asset is acquired in exchange for shares in the acquiring company. A transaction structure of this nature typically falls within the roll-over provisions contained in the Income Tax Act 58 of 1962 (“the Act”), allowing the companies to transact on a tax neutral basis. By using the roll-over provisions, companies believe they are failsafe and have become complacent about potential pitfalls arising from the amendments to the Act. One such amendment was the introduction of section 24BA which was inserted into the Act by the Taxation Laws Amendment Act of 2012. What many companies are not aware of is that an asset-for-share transaction is subject to the provisions of section 24BA.
The purpose of section 24BA is an anti-avoidance provision to address potential value shifting arrangements arising in the context of asset for share transactions. In essence, this section provides for the event where there is a mismatch in the value of the asset received and the value of the shares issued as consideration. In this instance, the company acquiring the asset would recognise a capital gain equal to the amount by which the value of the asset exceeds the value of the shares while the company receiving shares would be required to reduce the base cost in such shares with the same amount. For example, where Company A disposes of an asset with a market value of R100 to Company B, and Company B provides Company A with shares with a market value of R90, Company B would recognise a capital gain of R10 while Company A would reduce its base cost in the shares of Company B with R10. Section 24BA further applies to the converse where the value of the asset received is less than the value of the shares issued for such an asset. In such an instance, the amount by which the value of the shares exceeds the value of the asset would be deemed to be a dividend as defined in section 64D of the Act and would be regarded as a distribution of an asset in specie on the date such shares are issued. To illustrate this principle, where Company A disposes of an asset with a market value of R90 to Company B, and Company B provides Company A with shares with a market value of R100, Company B would be deemed to have paid an in specie distribution of R10 to Company A.
In order not to fall into the pitfalls in section 24BA, it is imperative that, even in the context of a group roll-over provision, a transaction is concluded on a value for value basis. It is further imperative to note that the provisions of section 24BA are based on the market value of the assets before the transaction and the market value of the shares issued after the transaction. As such, a valuation of both components would be required to satisfy oneself that the requirements of section 24BA are complied with.
Valuation is often believed to be an art and not a science due to the numerous methodologies available in conducting a valuation. This view is further supported by the fact that valuations could be influenced by the information used and assumptions applied in such methods. As a result, the value of the same asset and/or share could vary depending on the method used. This often occurs in the listed environment where the shares are valued at a discount in relation to the market value of the underlying assets. Put differently, it very often results in the underlying asset of the company having a much greater value than what is reflected in the value of the share price. The gold industry is an example of such an undervaluation as gold share prices are currently low, although it does not imply that the value of the underlying assets have a similar value. With this in mind, the question which arises in a listed environment, when listed shares are issued as consideration for the acquisition of an asset, should the value of the shares issued be determined with reference to the listed share price or should the value of shares issued resemble the value of the underlying mining assets.
Irrespective of the steps to be taken to ensure that a transaction would not fall within the ambit of section 24BA, section 24BA does provide for certain exclusions. It is recommended that, where companies have any uncertainty as to whether an envisaged transaction would be subject to section 24BA, the advice of a tax practitioner be sought. This would also make the company eligible for the potential remittance of understatement penalties imposed by SARS under the Tax Administration Act 28 of 2011 (“the Tax Admin Act”) as, by obtaining an opinion from a registered tax practitioner, the company would meet the requirements of section 223 of the Tax Admin Act provided that the remainder of the requirements of section 223 of the Tax Admin Act are also adhered to.
Gerdus van Zyl – Tax Advisor