The Applicant and the Fund approached SARS to determine the tax consequences of a transfer of listed shares from the applicant to a collective investment scheme in exchange for participatory interests in that collective investment scheme, in terms of sections 9C and 42 of the Income Tax Act, No. 58 of 1962 (the ITA) and section 8(1)(a)(i) of the Securities Transfer Tax Act, No. 25 of 2007 (the STT Act).
The Applicant is a resident family trust, whose assets, amongst other things, comprise of listed shares and immovable property. The Fund is a resident collective investment scheme as contemplated in the Collective Investment Schemes Control Act, No. 45 of 2002.
The Applicant seeks to transfer certain of these listed shares, which are held as long-term investments, to the Fund. A portion of the listed shares have been held by the Applicant for a period of at least three years, while the remainder has been held by the Applicant for less than three years, in which time their market value has far exceeded that of the base cost in the initial acquisition.
During this period, one of the trustees of the Applicant has been acting as the investment manager for the listed shares and is the settlor in the matter at hand. A decision was taken by the trustees that the listed shares, their investment management and the required administrative functions required in respect thereof should be undertaken the management of a professional investment fund.
As such, the applicant seeks to enter into an agreement in terms of which it will transfer the listed shares to the Fund and, in exchange, it will receive a participatory interest in the Fund.
The ruling issued by SARS is subject to the following additional conditions and assumptions:
- The fund meets all requirements to be considered a registered collective investment scheme as envisaged in section 1 of the Collective Investment Schemes Control Act.
- The acquisition of the listed shares by the Fund will be as a long-term investment.
- After the proposed transaction has been concluded, the shareholdings in the various listed companies held by the Fund shall not exceed the thresholds as prescribed in paragraph (a) of the definition of “asset-for share transaction” in section 42(1) of the ITA.
The Ruling made in connection with the proposed transaction is in respect of the year of assessment ending 29 February 2020 and is as follows:
- Section 9C(2) of the ITA will apply to the listed shares that have been held for three years or longer by the applicant and the applicant will be deemed to have acquired the participatory interests in the fund on the dates the listed shares were acquired.
- The proposed transaction between the applicant and the fund will qualify as an “asset-for-share transaction” as defined in paragraph (a) of that definition in section 42(1) of the Act.
- For purposes of section 42(2) of the Act, the applicant may, in determining the cost at which it will acquire the participatory interest in the fund, include the expenditure incurred as that of the market value of the listed shares held for a period of more than three years on “valuation date”.
- The actual expenditure incurred in relation to the listed shares, that does not constitute pre-valuation date assets and is allowed in terms of paragraph 20 of the Eighth Schedule, may be included in determining the cost at which the applicant will acquire the participatory interests in the fund.
- In terms of section 8(1)(a)(i) of the STT Act, the transfer of the listed shares in terms of the proposed transaction will qualify for exemption from securities transfer tax.
- The sworn affidavit or solemn declaration as contemplated in section 8(1)(a) of the STT Act is to be made by the public officer of the fund.