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South Africa: Proposed tax changes, assets acquired for debt

South Africa: Assets acquired in exchange for debt

The 2020 Draft Taxation Laws Amendment Bill proposes changes to close a “loophole” when certain assets are acquired in exchange for debt.

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Summary

Section 40CA was added to the Income Tax Act (effective 1 January 2013) to reflect a policy decision that companies must obtain a base cost when an asset is acquired by a company in exchange for the issue of shares. This was in response to a decision of the Supreme Court of Appeal that found the issue of shares by a company does not amount to “expenditure actually incurred.” Section 40CA was also drafted to apply when, instead of shares, debt is issued by the company to acquire the asset.

The introduction of section 40CA also came with an accompanying amendment to the so-called “connected person rule” as encapsulated in paragraph 38 of the Eighth Schedule to the Income Tax Act. Paragraph 38 deems the disposal of an asset to a connected person to be made for proceeds equal to market value, but the accompanying amendment rendered the provisions of paragraph 38 inapplicable when section 40CA applies to the transaction. This amendment created a loophole for companies to dispose of assets in a tax-neutral manner—one that was useful for transactions between group companies when the provisions of the so-called “corporate rules” were not accessible.

The South African Revenue Service—having become aware of this loophole—clarified that this is an unintended consequence of the amendments made when section 40CA was first introduced. To remedy this loophole, the 2020 Draft Taxation Laws Amendment Bill proposes changes so that section 40CA does not apply in instances when debt is issued.

Under the proposal, section 40CA would only apply in instances when shares are issued by a company as consideration for the acquisition of an asset. 


Read an August 2020 report [PDF 86 KB] prepared by the KPMG member firm in South Africa

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