Corporate reorganisations: the dividend stripping pitfall

Corporate reorganisations: the dividend stripping pitfall

• 27 May 2021
• Corporate Tax
• Nicolette Smit and Stephan Minne

Wednesday, 22 August 2018

Important:

This article is based on tax law for the tax year ending 28 February 2019.

Authors: Nicolette Smit and Stephan Minne (ENSafrica)

Under South African corporate reorganisation rules, tax consequences are deferred and do not crystalise at the time of the transaction, but a carefully planned restructuring transaction may result in hardship due to subsequent events. A recently proposed amendment illustrates this risk.

Tax relief under the existing corporate reorganization rules may be neutralized if assets acquired in terms of these rules are disposed of within 18 months.  

However, the consequences of a sale of capital assets within that period are often not severe. Other than disposals that result in equity holding below certain key levels (such as de-grouping) and in the absence of tax losses, the normal tax treatment generally applies to gains or losses on such disposal, based on the cost that was rolled over in terms of the corporate rules. The distinguishing feature of disposal within 18 months, is usually that any capital gain or loss that would have arisen had the asset not been acquired under the corporate rules, is ring-fenced.  

The Draft Taxation Laws Amendment Bill, 2018 was recently released for public comment. It proposes amendments to the so-called dividend stripping rules contained in, inter alia, paragraph 43A of the Eighth Schedule to the Income Tax Act, 1962. In this context, a sale of shares held on capital account within 18 months of acquiring such shares under the corporate rules, may have far-reaching consequences. 

This article first appeared on ensafrica.com.

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