The South African Revenue Service (SARS) released Binding Private Ruling, No 206 (the Ruling) on 14 September 2015. The Ruling dealt with the disposal by a share block company of sectional title units to its share block holders.
A resident company (Applicant), and a resident trust (Trust), held shares in a resident share block company (Share Block Company).
The Share Block Company owned three sectional title units. It was proposed that the Share Block Company would dispose of the sectional title units to the Applicant and the Trust. The Applicant and the Trust would then surrender their share block certificates and rights of use to the Share Block Company. These would then be cancelled.
Effectively, after the completion of the transaction, the Applicant and the Trust would directly hold the sectional title units, and would no longer hold shares in the Share Block Company.
On the assumption that the Applicant and the Trust held their shares as capital assets, SARS ruled that paragraph 67B of the Eighth Schedule to the Income Tax Act of 1962 (the Act) would apply to the disposal of the sectional title units by the Share Block Company.
Paragraph 67B of the Eighth Schedule to the Act effectively provides that, where a person has a right of use of a part of the property of a share block company, conferred by reason of that person holding a share in that share block company, and that person subsequently acquires ownership of that part of the property upon disposal by the share block company:
- The share block company must disregard any capital gain or loss resulting from the disposal.
- The person must disregard any capital gain or loss resulting from the disposal of its shares in the share block company.
In addition SARS ruled that, to the extent that the disposal by the Share Block
Company of the sectional title units constitutes a dividend in specie, it would be exempt from dividends tax in terms of section 64FA(1)(d) of the Act. Presumably this would only be relevant to the Trust.
For purposes of Value-Added Tax (VAT), SARS ruled that the supply of the sectional title units by the Share Block Company would be deemed to have been made in the course and furtherance of an enterprise, as contemplated in section 8(19) of the Value-Added Tax Act of 1991 (the VAT Act). The value of the supply would also be deemed to be nil in terms of section 10(27) of the VAT Act. Accordingly, the output VAT would be zero.
In terms of section 9(19) of the Transfer Duty Act of 1949, the transfer of the sectional title units would also be exempt from transfer duty.
Effectively, the provisions referred to above provide for roll-over relief where a share block company disposes of its property or parts thereof to a shareholder who has rights in respect of that property or part.
The Ruling illustrates the application of these provisions rather well, and also makes it clear that the provisions apply to undivided interests in sectional title units owned by share block companies.
Cliffe Dekker Hofmeyr
ITA: Section 64FA(1)(d) and paragraph 67B of the Eighth Schedule
VAT: Sections 8(19) and 10(27)
Transfer Duty Act: Section 9(19)
BPR 206
Editorial comment: Published SARS rulings are necessarily redacted summaries of the facts and circumstances. Consequently, they (and articles discussing them) should be treated with care and not simply relied on as they appear.