There are numerous reasons which may justify the restructuring of companies and a group of companies during their existence, whether due to changes in legislation, ownership, or in the financial position of companies that form part of the same group of companies. Whatever the reasons may be, restructuring could well result in certain tax obligations arising.  From “asset-for-share” transactions, amalgamation transactions, intra-group transactions, unbundling transactions, and relating to liquidation, winding-up, and deregistration transactions. These transactions may as a consequence result in the payment of Capital Gains Tax; recoupments in respect of allowance assets, Security Transfer Tax, normal Income Tax or Value Added Tax, etc. 

The Income Tax Act 58 of 1962 (“ITA”) has specific sections dealing with transactions between groups of companies. These provisions, in Sections 41 to 47, are generally referred to as the “Corporate Rules to Restructuring” or the “Rollover Provisions” (“corporate rules”).

The purpose of these corporate rules is to facilitate the growth of the economy by enabling South African taxpayers who wish to enter into transactions without real economic gains, to restructure their affairs in a tax neutral basis, or to enter into transactions in the ordinary course of business (such as mergers and acquisitions) that may under normal circumstances have immediate adverse tax consequences.  However, in terms of the corporate rules, those obligations are “rolled over” to a later date. Essentially, these provisions provide for a deferral of certain tax consequences as a result of corporate restructuring.

Sections 41 to 47 of the ITA are not intended to provide taxpayers with a tax benefit, however, if that is the taxpayers predominant intention, the anti-avoidance provisions may be applied, leading to significant tax obligations accompanied by severe penalties and interest being imposed by SARS.

The corporate rules contained in Sections 41 to 47 of the ITA are generally set up to deal with relief in respect of the domestic tax implications, on the one hand, but on the other hand also cover cross-border related transactions and the relief related thereto.

Rollover relief is provided in respect of various types of taxes which can arise in a restructuring scenario. Sections 41 to 47 generally take precedence over various other sections in the ITA, save for those that are specifically excluded by Section 41, as they may contain either a different dispensation or are anti avoidance provisions.

Not all restructuring transactions, or elements thereof may qualify for the relief contained in these corporate rules. Sections 41 to 47 each set out in the definitions thereto, the specific transactions which qualify for the rollover relief.

In recent times, we have seen the international economy evolve into a complex web that involves transactions that are both domestic and others involving various international jurisdictions. This ever-changing global corporate landscape may from time to time have a direct impact on South Africa, which poses various challenges that often necessitate amendments to domestic legislation. It is therefore important to ensure that corporate structures that are in place are fully compliant and remain compliant during their subsistence to avoid any attacks from SARS. Corporates should revisit their structuring when legislation changes, to ensure continued compliance with the relevant legislation.

A taxpayer that is fully informed as to the relevant legislative provisions which deal with relief measures contained in the corporate rules, would be in a better position to decide how they would or should structure or restructure their company or personal affairs.

It is advisable to always obtain advice from a tax professional on any proposed structuring or restructuring transaction and its specific facts and circumstances to determine whether the transaction qualifies for the roll over relief.

By Ronie Nyama (Director) and Mpho Diphagwe (Associate) | Tax Department