Business Tax and Company Law Quarterly

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The first issue of the Business Tax and Company Law Quarterly 2011 has been published. Abstracts of each article can be viewed below.

Share Buy-backs under the Companies Acts
The Devil is in the Deta il!
Milton Seligson SC

Since 1999 South African companies have been permitted to acquire their own shares from shareholders by virtue of an amendment to section 85 of the current Companies Act 61 of 1973. Such acquisitions, described in this article as ‘share buy-backs’, have become increasingly commonplace and play an important role in company reorganisations, including black empowerment and management buy-out transactions. In the case of listed companies they may have the effect of supporting the company’s share market price by reducing the number of issued shares and increasing the net asset value of the remaining issued shares. This article explores first the statutory requirements for a share buy-back

under the current Act and examines the provisions of a number of related provisions of the Act that interact with, or facilitate, the operation of section 85.

This is followed by a discussion of the tax consequences of share buy-backs under the current provisions of the Income Tax Act, which will have similar application to share buy-backs under the provisions of the new Companies Act 71 of 2008, when it comes into force. The article further critically analyses the provisions of the new Companies Act relating to share buy-backs and their requirements. It examines the extent to which they depart from well-established principles already embodied in the current Act. The article also deals with amendments to the new Act as proposed in the Companies Amendment Bill 40 of 2010, and which are designed to rectify some of the serious flaws in the new Act as enacted. The key requirements of sections 46 and 48 of the new Act are identified, as are other related provisions, including the solvency and liquidity test described in section 4, which is pivotal to the validity of a share buy-back. The article assesses the flaws in the buy-back provisions as enacted, as well as the corrective effect of the proposed amendments in the draft Bill, and calls for the process of revision to be taken further before the new Companies legislation is finally brought into operation.

Tax Relief Within a Group
A Potentially Unpleasant Result
Michael Rudnicki
Abstract

Section 45 of the Income Tax Act provides roll-over relief in respect of capital gains tax and income tax where assets are disposed of in terms of a qualifying intra-group transaction, that is, a transaction between companies within the same group of companies. Commercial transactions undertaken within that group subsequent to the application of the intra-group provisions may cause de-grouping: simply put, adverse tax implications are triggered in respect of the assets disposed of, or deemed to have been disposed of, within the group. The de-grouping provisions, which are essentially anti-avoidance provisions, are in section 45(4)(b) and (4B).

Tax (income tax and capital gains tax) is triggered in terms of section 45(4)(b) of the Income Tax Act where the group of companies de-groups (i.e. falls below a 70% qualifying shareholding) within a period of six years from the date of the intra-group transaction. The difficulty with the application of this provision is that a company high up in a hierarchy of companies within a group whose equity shareholding falls below 70% could trigger an unintended tax consequence for the transferor company (i.e. the seller) in relation to the disposal, intra-group, of assets. A de-grouping can also be triggered under section 45(4B) where any consideration in relation to a section 45 intra-group disposal, or any amount derived directly or indirectly from such consideration, leaves the qualifying ‘group of companies’ within a period of two years from the date of disposal. These specific anti-avoidance measures form part of section 45 of the Act and trigger premature tax events, regardless of the rationale for any commercial decisions that may have been taken. This article discusses the application of these unpleasant measures.

Leasehold Improvements
Something Old, Something New,Something Uncerta in
Des Kruger

The income tax treatment of leasehold improvements where the improvements are effected by the lessee in terms of a contractual obligation under the lease agreement is settled law from an income tax perspective. The lessor is subject to tax on the benefit derived, while the lessee is entitled to tax relief in respect of the cost incurred in erecting the improvements.

However, what the income tax position is where the lessee is not obliged to effect the improvements in terms of the lease agreement, does not seem to me to be settled law. It is apparent that the present practice is reliant on the argument that the benefit to the lessor in these circumstances cannot be determined — the Income Tax Act provides a valuation mechanism only where the lessee is obliged to erect the improvements. SARS has sought to provide guidance in relation to the capital gains tax implications that arise where improvements are effected by a lessee on land belonging to the lessor. I am unable to agree with the SARS analysis for the reasons advanced in the article. Most problematic for me is the VAT treatment of leasehold improvement arrangements. It seems self-evident that the lessee is making a supply of the improvements to the lessor, but what is the consideration derived by the lessee in these circumstances? The lessor is in turn clearly making a supply of use and occupation (a service for VAT purposes), but is the consideration derived by the lessor only the cash rental received, or, as in the case of income tax, the value of the improvements acquired by the lessor by operation of law?