Value shifting arrangements still applicable to companies and triggering adverse tax implications

amalgamation 1Author: Andre Lewis (Cliff Dekker Hofmeyer)

The Eighth Schedule to the Income Tax Act, No 58 of 1962 (Act) contains particular anti-avoidance provisions dealing with so called value-shifting arrangements. The South African Revenue Service (SARS) Comprehensive Guide to Capital Gains Tax (Issue 4) (CGT Guide) indicates that value shifting involves the effective transfer of value from one entity to another without constituting an ordinary disposal for capital gains tax purposes. Without these specific provisions, the concern is that entities could manipulate the value of assets in order to obtain a capital gains tax benefit.

In the Taxation Laws Amendment Act, 2012 (TLA 2012) a new s24BA of the Act was introduced to ensure that asset-for-share transactions take place for equal value. In other words, the market value of the asset acquired by the company must equal the market value of the shares issued in exchange, otherwise it will trigger the attendant tax implications for the person receiving the benefit.

As a result of the new anti-avoidance provisions in s24BA of the Act the value shifting arrangement definition was to be amended such that it would no longer be applicable to companies and only apply to trusts and partnerships. However, this amendment was only to be effective from 1 January 2014 as National Treasury required further time to ensure that the change did not give rise to anti-avoidance.

In the initial Draft Taxation Laws Amendment Bill, 2013 no mention was made of the potential repeal of s102 of the TLA 2012, which provision was to exclude companies from the value shifting arrangement provisions. However, in the final Taxation Laws Amendment Act, 2013 (TLA 2013), it was announced that the proposed amendment to the value shifting arrangement provisions would be repealed and has been repealed with effect from 1 February 2013.

The Explanatory Memorandum (EM) on the TLA 2013 simply states that as a consequence of the repeal of s24B of the Act, the value shifting arrangement rules are necessary to counter transactions that shift value by the issue of shares between connected persons. However, this statement appears to be at odds with the fact that s24BA of the Act, the provision introduced to deal with these value mismatches, is still applicable. In addition, National Treasury indicated in the EM on the TLA 2012 that value shifting provisions have proved to be ineffective in respect of companies and that the formal ‘connected persons’ relationship (being one of the requirements for the application of the value shifting arrangement provisions) is often lacking in many anti avoidance transactions. If the value shifting arrangement provisions were ‘ineffective’ in the case of companies, why then simply reinstate the old provisions?

To appreciate the adverse tax implications that may be triggered as a result of the concurrent application of s24BA of the Act and the value shifting arrangement rules it is helpful to refer to the following example in Chapter 21.3.6 of the CGT Guide:

“Example – Value shifting by issuing shares at a discount


Bongo is the sole shareholder of Why (Pty) Ltd in which he holds 2 shares of R1 each. The retained income in the company amounts to R99 998. The market value of the shares on 1 October 2005 is R100 000. The base cost of Bongo’s 2 shares on valuation date is R50 000. On 1 October 2005, Why (Pty) Ltd issues a further share of R1 to Bongo’s daughter, Cynthia, at a cost of R1.


[For detailed workings of the value shifting arrangement provisions refer to Chapter 21.3.6 of the CGT Guide]

Bongo’s Capital Gain – R16 833

Cynthia’s Base Cost – R33 334”

Section 24BA of the Act only applies to the disposal of an asset in exchange for the issue of shares (as opposed to cash in exchange for the issue of shares). Therefore, if the same transaction were implemented under the current legislation but Cynthia disposed of an asset worth R1 to Why (Pty) Ltd (ie as opposed to subscribing for shares for cash in the company), the difference between the market value of the share immediately after the issue (say, R33 334) and the market value of the assets immediately before the disposal (say, R1) would be deemed to be a dividend in terms of s24BA(3)(b) of the Act. Not only will the value shifting arrangement provisions contained in the Eighth Schedule to the Act be triggered but there will be an additional dividend withholding tax liability on Cynthia of R5 000.

In light of National Treasury’s late decision to repeal the exclusion of companies from the value shifting arrangement provisions it is not clear whether it was their intention that both the value shifting arrangement provisions and s24BA of the Act may be triggered in the same transaction. However, the CGT Guide does indicate that the donations tax and dividends tax implications of these types of value shifting transactions should not be lost sight of.  


Taxpayers entering into asset-for-share transactions should therefore carefully consider these provisions to fully understand the potential tax implications. Importantly, s24BA of the Act and the value shifting arrangement provisions contain a number of specific requirements and exclusions that must be considered to determine the attendant tax consequences, which will depend on the facts and circumstances of the particular transaction concerned.