Author: Emil Brincker – Tax Director (Cliffe Dekker Hofmeyr)
The South African Revenue Service (SARS) recently issued a draft Binding General Ruling (BGR) that addresses the interpretation of the words “at the end of the day after that distribution” as used in s46(3)(a)(v) of the Income Tax Act 58 of 1962 (Act). Section 46 of the Act deals with unbundling transactions and provides parties to such a transaction with relief from various taxes that would otherwise become payable.
Section 46(1) in particular defines an unbundling transaction as any transaction in terms of which an ‘unbundling’ company transfers its full equity shareholding in an ‘unbundled’ company to its shareholders, in accordance with the effective interest held by the shareholders in the unbundling company.
In terms of s46(3)(a)(i)(aa) of the Act, where a shareholder acquires unbundled shares through an unbundling transaction, the shareholder must allocate a portion of the expenditure and any market value on valuation date attributable to the unbundling shares to the unbundled shares. In making this allocation, a formula is used.
Section 46(3)(a)(v) of the Act requires that the shareholder applies the ratio that the market value of the unbundled shares “as at the end of the day after that distribution”, bears to the sum of the market values of the unbundled and unbundling company shares.
In this regard it should be noted that there has been some confusion as to the interpretation of the requirement “as at the end of the day after that distribution”. Clarity was therefore needed on whether this requirement means at the end of the day on which the unbundling transaction occurs or whether this requirement refers to the following day after which the unbundling transaction occurs.
In applying s46(3)(a)(v) of the Act, it must first be indicated when the distribution of the unbundled shares occurs. In applying the law, SARS has indicated that generally a distribution will occur when the shareholder becomes unconditionally entitled to the distribution, that is, when the distribution accrues to the shareholder. Having regard to the aforementioned, it should be noted that SARS has confirmed that the holder of the shares will become unconditionally entitled to a distribution under an unbundling transaction on the first day that the unbundling and the unbundled shares begin trading separately.
In light of the above, SARS ruled that for purposes of s46(3)(a)(v) of the Act and in relation to listed shares, “as at the end of the day after that distribution” means as at the end of the first business day after the last day to trade. This is essentially the first day on which the unbundling and unbundled shares begin trading independently of each other.
SARS further ruled that for purposes of s46(3)(a)(v) and in relation to unlisted shares, “as at the end of the day after that distribution” means as at the end of the day on which the shareholders become entitled to the distribution. In this regard it be noted that the day on which the shareholders of unlisted shares become entitled to the distribution will depend on the facts and circumstances of the particular case. Generally regard must be had to s59 of the Companies Act No 71 of 2008, which provides that the holders of unlisted shares would become entitled to a distribution on the date on which the distribution is approved by the board of directors unless the board has determined that the distribution will be payable to the shareholders registered in the company’s register on a specified date, in which case it will be on that date. Regard must be had to the company’s memorandum of incorporation and the relevant director’s resolution.