Here are the four tips to reorganise your business to minimise capital gains tax
You can move assets around through corporate formations, reorganisations, share swaps and amalgamations to escape the capital gain tax net, even though these disposals don't give you immediate financial gain.
1. Company formations – Section 42 ITA;
2. Share Swaps – Section 43 ITA;
3. Intra-group transaction – Section 45 ITA; and
4. Amalgamations – Section 44 ITA.
Let's have a look at these in more detail.
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1. Company formations – Section 42
This means that if you conduct business as a sole proprietor, and you want to set up a company or close corporation, you can transfer your business assets to the corporate entity without incurring any capital gains tax
liability using a qualifying company formation transaction
Definition: Company formation transaction
This is when you dispose of a capital asset to a company incorporated in South Africa i.e. a resident company in exchange for equity shares in that company
You must be a natural person and employed by your company on a full-time basis and must hold at least 20% of the equity shares or voting rights in the company. This must take place by the close of business on the day the asset is transferred. Your company can't dispose of these assets for a period of 18 months after the transfer otherwise the roll-over relief is lost.
You can get a roll-over if you've disposed of the asset at the base cost
2. Share Swaps – Section 43
A share swap is done where you want to introduce a holding company
The roll-over relief is similar to company formation where you roll-over the base cost of the shares to the transferee.
If you want to add more subsidiaries, you simply set up new companies. These must be wholly-owned by the holding company. If you want to shift assets around in the newly formed group, and don't want to pay capital gains tax
on the transfer of these assets, you can do an intra-group transfer. This won't attract capital gains tax
3. Intra-group transaction – Section 45
This point refers to the situation that happens when you dispose of an asset to another company but both companies form part of the same group at the end of the day the transaction takes place. As the holding company, you must hold at least 20% of the equity shares or voting rights in the subsidiary companies.
Your company will be considered to have disposed of the assets for proceeds equal to the base cost so that there is no capital gain for your company. The receiving company is thought to have acquired the assets at the base cost so that it's rolled-over from your company to the receiving company.
4. Amalgamations – Section 44
An amalgamation happens when your company (amalgamated company) disposes of all its assets to another company (resultant company) through an amalgamation, conversion or merger and as a result your company ceases to exist. Roll-over relief will only apply to depreciable assets where they are exchanged for shares in the resultant company. Try liquidate, or terminate, the corporate existence of the amalgamated company within six months of the transfer of assets. Your assets will be transferred tax-free so the base cost of the assets transferred is rolled-over from your company to the resultant company.