Value-Shifting Rules (Section 24BA and Section 40CA)

Value-Shifting Rules (Section 24BA and Section 40CA)

• 18 March 2020
• Corporate Tax
• The Tax Faculty

Important:

This article is contains an amendment which became effective on 1 January 2020 and applies in respect of acquisitions made on or after that date.

This article discuss the anti-avoidance principles preventing the transfer of high value assets to a company in return for low value shares issued by the company and the issuance of high value shares for low value assets.

Where a company acquires an asset from a person in exchange for an issue of shares, and:

• The market value of the asset > the market value of the shares, then:
  • Excess is deemed to be a capital gain
  • Base cost of the shares issued must be reduced in the hands of the person selling the asset by the amount of that excess
• Market value of the shares > market value of that asset
  • Excess is deemed to be a dividend that consists of a distribution of an asset in specie that is paid by the company on the date of that issue

Consider the following example:

Company A acquires an asset with a market value of R15 million from Person X and as consideration for the assets Company A issues shares with a market value of R10 million after the transaction:

• Person X has a base cost of R15 million for the shares issued by Company A as he incurred a cost equal to the market value of his asset in order to acquire the shares;
• In terms of section 40CA, Company A is deemed to have a base cost of R 10 million for the assets (i.e. being the market value of the shares it issued immediately after the transaction);
• Given the difference in value, section 24BA applies to the transaction;
• As a result, Company A is deemed to have a capital gain of R 5 million (i.e. the market value of the assets immediately before the transaction of R15 million less  the market value of the shares issued immediately after they are issued of R10 million);
• In addition, Person X must reduce his base cost for the shares with R 5 million, thereby not allowing for a base cost increase for shares of a lower value.

Important:

An amendment provides that the deemed expenditure incurred by a company that acquires an asset in exchange for the issue of its own shares must be equal to:

• The market value of the issued shares;

PLUS

• Any deemed capital gain which arose in terms of the value shifting rules 

The amendment became effective on 1 January 2020 and applies in respect of acquisitions made on or after that date.

This article first appeared on taxfaculty.ac.za.

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