With the introduction of the new Companies Act, a number of implications arise in relation to the interpretation and application of the Income Tax Act. One of the fundamental changes introduced by the new Companies Act is that there will no longer be any par value shares. Rather, it is envisaged that there will be shares without any nominal or par value and this is legislated in terms of section 35 of the new Companies Act. The question which arises is what will occur in relation to existing companies where the share capital consists of shares with a nominal value based on the provisions of the old Companies Act. This becomes relevant where, for instance, a company wishes to undertake a restructuring and its current share capital is insufficient for that purpose.
The new Companies Act contains specific provisions and regulations which address the process to be followed in order to effect a conversion of existing share capital of par value shares to no par value shares. The process essentially entails that a report is prepared and special resolutions are adopted by the shareholders in order to implement the conversion of the share capital.
In effecting a conversion of par value shares to no par value shares, the question which arises is whether there are any tax consequences which may arise. Specifically, the question relates to whether there is –
- any "disposal" for purposes of the Eighth Schedule to the Income Tax Act if the shares are held on capital account;
- a "receipt" or "accrual" as contemplated in the definition of gross income if the shares are held on revenue account.
In binding class ruling 35 dated 2 November 2012, the South African Revenue Service was requested to consider the tax implications of a conversion of par value shares to no par value shares pursuant to a proposed restructuring of the applicant having regard to the necessity of complying with the new Companies Act. In implementing the conversion by the applicant of its ordinary par value shares to ordinary no par value shares the facts were that –
- the proposed transaction will be implemented on the basis that all ordinary par value shares in the applicant will be converted to ordinary no par value shares and there will be no distinction between any shareholders;
- the rights relating to the shares (being voting and participation rights) in the applicant subsequent to the conversion will remain unchanged;
- the rights of the shareholders in the applicant will be preserved pursuant to the implementation of the proposed transaction;
- there will be no compensation payable to any of the shareholders pursuant to the conversion; and
- all shareholders will be treated equally in relation to the implementation of the proposed transaction.
In other words, the conversion was effected such that there were to be no changes to the shareholders' rights. The factual circumstances are important in assessing whether there has been any "disposal" for capital gains tax purposes or any "receipt of income" for income tax purposes.
Whilst there is no definition of what constitutes a "conversion" in the Income Tax Act, the SARS' Comprehensive Guide to Capital Gains Tax states that a "conversion involves a substantive change in the rights attaching to an asset". The tax consequences of a conversion of par value shares to no par value shares pursuant to the introduction of the new Companies Act are further described in the Guide as follows -
"Given that a share is a bundle of rights, there will be no disposal if those rights remain unchanged following a conversion from shares of par value to shares of no par value. However, if some of those rights are lost or diminished there will clearly be a disposal or part-disposal."
On the basis of the above view, it is possible to conclude that there should be no "disposal" in circumstances where there are no changes in rights following a share conversion.
In the instance where the shares are held on revenue account, it is arguable that none of the shareholders in a taxpayer will "receive" any amount as there will be no payment of any amount, in cash or otherwise. Further, no additional rights are granted to the shareholders. Thus, it will be unnecessary to account for any income tax pursuant to the conversion of the shares.
Finally, it is necessary to consider if there will be any "transfer" of shares for purposes of the Securities Transfer Tax Act. In this regard, there will be no "disposal" as contemplated in the definition of "transfer" and the ownership in and to the shares will remain the same pursuant to the conversion of the shares.
Having regard to the factual circumstances and the preservation of rights following the implementation of the conversion of the shares it was confirmed in the ruling that there is no –
- disposal for capital gains tax purposes;
- receipt or accrual for income tax purposes;
- securities transfer tax levied pursuant to the transfer of the shares.
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.