Income tax differs depeneding on whether you're transferring trading stock or an allowance asset
Trading stock: The transfer of trading stock is deemed to be at cost. This means if you're the person making the transfer, you won't make any profit. In fact, you're deemed to have got the equity shares in that company at the same value. This means you won't pay income tax on the sale of the trading stock (cost = sales price, thus no profit).
However, you should know that there is a difference if you get a part consideration.
That means, if you get paid in cash as well as the equity shares, the cash portion is seen as payment for the disposal and SARS will tax it in the normal way.
Allowance asset: An allowance asset is described above under the discussion on Section 45. Under Section 42, where
you transfer an allowance asset to a company in an asset-for-share transaction, the allowances and
recoupments are carried over to the acquiring company in the same manner as our example above
for Section 45.
But there's good news. When transferring allowance assets you get rollover relief' for both companies.
And because there are no adverse results due to the transaction, it means there's no recoupment and no income tax.
If, however, the allowance asset you transfer to the company is intended to be used as trading stock, the following applies:
• The person making the transfer (i.e. the transferor) won't have recoupments;
• The acquiring company (the transferee) is deemed to buy the asset at the same time the transferor originally acquired them, and at the same cost. So the acquiring company steps into the seller's shoes;
• The transferee can choose for the base cost of the asset to be the market value as at 1 October 2001. Or it can use the time-apportionment method to calculate the base cost; and
• Where the seller has claimed any capital allowances for the asset, the transferee must reduce the deemed cost by these capital allowances.
Just remember that if it isn't trading stock then the rules mentioned above for capital assets apply!
*********** Best Seller ***************
PS: Get every South African tax law explained by our experts
The Practical Tax Loose Leaf Service offers you:
All the definitions and legal regulations, useful advice, exceptions to the rules that help you slip through the legislative jungle of taxes.
Case studies and practical examples that show you what elements you should consider for your taxes to be perfect.
Red flags you need to watch out for and the penalties you'll face if you don't respect them.
Sample templates at your disposal, ready to be filled in, customised and printed.
Click here for more details