Two companies entered into an amalgamation transaction conducted under section 44 of the Income Tax Act.  The effect of a section 44 transaction is that the assets of a company, the amalgamating company (A), are transferred to a member of the same group, in return for shares in the recipient company, known as the resultant company (R).  A then distributes its shares in R as a dividend in specie to its holding company, after which its existence must be terminated within 36 months. According to section 44(13), if the termination does not happen within the stipulated period, or if steps are taken to withdraw or invalidate the termination, the benefits of section 44 do not apply.  These benefits are:

• rollover relief: the assets pass from A to R at base cost in the case of capital assets and at carrying value in the case of trading stock, while the base cost and allowances of allowance assets are transferred to R. In other words, there is no immediate tax consequence;
• there is no transfer duty on the transfer of immovable property; and
• VAT is not payable on the supply of the assets in question.

This is what happened in the present matter and A was duly deregistered as required by section 44.  R then discovered that the parties had omitted to transfer an immovable property from A to R. The property was still registered in the Deeds Office in the name of A. So R was faced with having to procure the re-registration of A in order to get the immovable property transferred to R. However, in addition to the administrative difficulties and costs involved in applying to court for re-registration and retrieving the immovable property from its bona vacantia status, the fiscal implications of the omission were serious. Firstly, the transaction no longer qualified under section 44, because a condition of a qualifying amalgamation transaction is that all the assets of A must be transferred, in terms of the definition of “amalgamation transaction” in section 44(1). And secondly, the relief from income tax, transfer duty and VAT no longer applied, in terms of section 44(13).

So R applied for a ruling enabling it to apply for re-registration of A so as to effect the transfer without losing the benefits of section 44. The ruling makes no mention of the fact that the transaction was disqualified from section 44 altogether because of the failure to transfer all A’s assets to R. It seems that SARS must have condoned this breach without stating as much in BPR 237.

SARS issued a ruling favourable to R: the rollover relief would still apply; the reinstatement and subsequent deregistration would not trigger section 44(13); section 8(25) of the VAT Act would continue to apply to exempt the transaction from VAT; and the Transfer Duty Act section 9(1)(l)(iB) exemption would apply to the transfer.

SARS imposed certain conditions to the ruling: R would have to approach National Treasury and Public Works to ensure that they had no objection to the re-registration, in view of the fact that, as bona vacantia; the property now belonged to the State; and R would have to advertise the application in a local newspaper. Finally, R would have to make the necessary re-registration application in terms of CIPC Practice Note 6 of 2012.

Whilst one can sympathise with R, the fact is that SARS overruled the law in making this ruling, and one wonders whether this is a healthy precedent. BDR 237 does have the merit of indicating what needs to be done in these bona vacantia instances.

Peter Surtees