Most Read Contributor in South Africa, September 2016
With the introduction of the Companies Act No. 71 of 2008 with
effect from 1 May 2011, South African companies may convert their
existing par value shares into no par value shares. Does this
voluntary conversion trigger a 'disposal' of an
'asset' for capital gains tax ("CGT") purposes
and thereby give rise to a liability for CGT in the hands of the
In terms of the Eighth Schedule to the Income Tax Act, 1962
("the 8th Schedule"), an 'asset' is widely
defined and includes a right or interest of whatever nature to or
in moveable, immovable, corporeal and incorporeal property. In
Standard Bank of South Africa Ltd & another v Ocean
Commodities Inc & others Corbett JA stated that
"a share in a company consists of a bundle, or
conglomerate, of personal rights entitling the holder thereof to a
certain interest in the company, its assets and
dividends". Accordingly, from a shareholder's
perspective the rights attaching to a share include the right to
vote, the right to dividends and the right to participate in the
winding up of a company.
If there is a 'disposal' of any of these rights
attaching to a share, a CGT event will take place, which could
potentially result in tax liability in the hands of the
shareholder. A 'disposal' is also widely defined and
includes any disposal of an asset including, inter alia, a
variation, conversion or exchange of an asset. In terms of Issue 3
of the Comprehensive Guide to Capital Gains Tax:
the word 'variation' must be interpreted in the context
of the disposal of an asset, i.e. the principle is that a person
must have disposed of an asset in the sense of having parted with
the whole or a portion of it;
a conversion involves a substantive change in the rights
attaching to an asset; and
an exchange of an asset is similar to a barter transaction, it
requires disposing of one asset in exchange for another.
The key question is, therefore, whether there is a difference
between the rights of the par value shares and the rights of the no
par value shares once converted. If there is no difference, or if
there is no substantive difference or change in the rights, there
will be no 'disposal' for CGT purposes.
It should be possible to ensure that the rights of the no par
value shares are the same as the rights of the par value shares,
the conversion from a par value share to a no par value share
should not result in a variation, conversion or exchange as
contemplated by the 8th Schedule. It is important to distinguish
between the rights attaching to the share and the contractual
rights of the shareholders. A voluntary conversion from par value
shares to no par value shares would not necessarily change these
contractual rights, and any variation to the contractual rights
would need to be considered and evaluated separately.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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In response to information provided by FIRS, NSE has sent letters to publicly listed companies, who were purportedly identified by FIRS as non-compliant.
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