The sale of a business is often a complex venture and requires consideration of various facts in examining the financial reality behind the sale. From the outset, it is important to consider historical transactions and how they may have a detrimental impact on the current sale being considered.
For purposes of this article, several factors are highlighted to consider in pursuance of the sale of a business. These factors, amongst others, include:
- Clawback provisions of the corporate restructuring rules: These rules, as contained in sections 41 to 47 of the Income Tax Act No. 58 of 1962 (“the Act”), potentially provide corporate roll-over relief for assets transferred between companies forming part of the same group. Provided that these rules were used to reorganise the group in an attempt to make it ready for sale or previously to ease administration within the group, it is important to be mindful of the impact of these rules.
Most of these rules impose a restriction on the transfer of assets for 18 months of the acquisition thereof. If this “clawback” applies, the assets sold must be included in the income of that party if any amount received by or accrued to that party in respect of the disposal of that asset is less than or equal to the market value of that asset at the beginning of the 18 months.
- Dividend stripping: This is generally done by extracting value from a business prior to a sale by means of an exempt dividend. Dividend stripping rules were inserted to curb the use of dividend stripping structures to artificially reduce capital gains tax consequences. Dividend stripping generally occurs when a resident shareholder company that is a prospective seller of shares in a target company avoids income tax, including capital gains tax. This is done by ensuring that the target company declares a significant (tax-exempt) dividend to the resident shareholder company before selling the shares in the target company to the prospective purchaser.
The sale can then be affected at a lower amount by avoiding higher taxes, including capital gains tax. It is, in this regard, important for taxpayers to be aware of the application of both sections 22B and paragraph 43A (of the Eighth Schedule) of the Act. Despite their similar wording, the former applies to shares held as trading stock, and the latter applies to shares held as capital assets.
- Reportable Arrangements: As contemplated in Part B of Chapter 4 of the Tax Administration Act No. 28 of 2011, an “arrangement” falling within the criteria set out in section 35(1), or one specifically outlined in the public notice issued by the Commissioner of SARS in terms of subsection 35(2), will be reportable to SARS within 45 business days of any amount first being received by or accruing to, or first being paid by or incurred by, any participant in the said arrangement unless the arrangement is specifically excluded in terms of section 36 of the same legislation, or by the Commissioner of SARS in a public notice issued in terms of subsection 36(4). The term arrangement includes any transaction, scheme, operation or understanding.
The reportable arrangement notice issued in terms of the Tax Administration Act (issued on 3 February 2016) sets out so-called “automatically” reportable arrangements. Insofar as one or more persons acquire the controlling interest in a company that carried forward or reasonably expects to carry forward a balance of assessed loss in excess of R50 million i) from the year of assessment immediately preceding the year in which the controlling interest is acquired, or ii) in the year of assessment in which the controlling interest is acquired, or directly or indirectly holds a controlling interest in a company referred to in (i) and (ii), such arrangement will be reportable.
Even though these factors do not represent a closed list, taxpayers should avail themselves of the potential detrimental impact of these past transactions on the prospective sale of their businesses and their underlying assets.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)