Abstract

This article relates to asset-for-share transactions under section 42 of the Income Tax Act and addresses the question as to how many shares must be issued to the transferee company in exchange for the asset or assets transferred, so as to comply with the section.
The author gives examples to illustrate the operation of section 42 and the problems that can arise in asset-for-share transactions, particularly where assets have different values and more than one share is issued in exchange. It is suggested that if there are insufficient shares available to match the relative value of the assets being exchanged, the solution is to allocate the aggregate base cost of the assets to the shares issued. This solution will not, however work in the case of pre-valuation date assets, for which there are different methods prescribed for determining value. In such a case, the solution suggested is to allocate shares with distinctive certificate numbers to particular pre-valuation date assets based on their relative market value. The author suggests that, alternatively, it may be time for legislative intervention to simplify matters, by the introduction of a rule similar to that in paragraph 76B of the Eighth Schedule to the Act.
The article suggests that SARS should give comfort to taxpayers by adopting the suggested solution for post-valuation date assets in an Interpretation Note, or perhaps resorting to legislation to resolve the complexity. Finally, the article also considers the application and effect of the value-for-value rule in section 24BA of the Income Tax Act, which applies to section 42 asset-for-share transactions.