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South Africa Drafts Tax Ruling On Unbundling Transactions

by Lorys Charalambous, Tax-News.com, Cyprus

27 November 2014


The South African Revenue Service (SARS) has issued a draft Binding General Ruling (BGR) that addresses the interpretation of Section 46 of the Income Tax Act, which deals with unbundling transactions.

Under an unbundling transaction a company (the unbundling company) distributes all the shares in another company (the unbundled company) to its shareholders. Without Section 46, the unbundling company would have been deemed to dispose of the shares at market value, while the shareholders would be deemed to acquire them at the same market value.

However, Section 46 overrides this treatment by permitting the unbundling company to disregard the disposal, and by requiring the unbundling company shareholders to allocate some of the base cost of their unbundling company shares to the unbundled company shares.

A formula is used to perform this allocation by applying the ratio that the market value of the unbundled company shares bears to the sum of the market values of the unbundled and unbundling company shares. Under Section 46, the relevant market values are to be determined "at the end of the day after that distribution."

As there has been some confusion whether "at the end of the day after that distribution" means either at the end of the day on which the unbundling transaction occurs or at the end of the next day, the draft BGR clarifies that it signifies "at the end of the day on which the unbundling transaction occurs."

For listed shares, this will be the first business day after the "last day to trade cum dividend." For unlisted shares, the BGR notes that it will depend on the facts and circumstances of the case and regard will have to be had to the memorandum of incorporation and the relevant directors' resolution.

TAGS: individuals | South Africa | compliance | tax | investment | business | tax compliance | equity investment | corporation tax | individual income tax | Africa | Tax

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