Amendment to section 45 intra-group transactions

An intra-group transaction envisaged in section 45 of the Income Tax Act allows for the tax neutral transfer of assets between companies forming part of the same group. Any tax liability that would have been triggered will be deferred as a result. However, to prevent abuse of the corporate flexibility it allows, certain anti-avoidance provisions have been enacted.

The anti-avoidance provisions

The first and foremost is the “de-grouping charge” which may rear its head for up to six years following the conclusion of the intra-group transaction. The de-grouping charge provides that if the transferor (i.e. the company relinquishing the asset) and the transferee (i.e. the recipient of the asset) companies cease to form part of the same group within 6 years of the conclusion of the intra-group transaction, then any deferred tax benefit obtained from the transaction is triggered in the hands of the transferee.

The second is the “zero base cost rule” contained in section 45(3A) of the Act which applies where an asset is transferred by the transferor to the transferee in exchange for debt (i.e. where an asset is sold on loan account) or non-equity shares and deems the debt or non-equity shares to have been acquired for nil consideration. This prevents the transferor from disposing of the debt (i.e. a loan claim) or non-equity shares to an external party without triggering an adversely large tax liability.

It should be noted that this anti-avoidance provision applies for an indefinite period of time in its current iteration.

The third is the “early disposal provision” which applies to ring-fence the gain or loss on disposal of an asset acquired in terms of an intra-group transaction in the hands of the transferee where they disposed of the asset within 18 months following the conclusion of the transaction.

The 2020 amendment

In certain instances, a taxpayer could have the unfortunate luck of triggering multiple anti- avoidance provisions simultaneously. For example, the intra-group transaction could be implemented in a manner where the transfer of an asset is funded by the issue of debt or non-equity shares by a group company – thereby leaving the door open to the zero base cost rule, and a de-grouping subsequently occurs within six years – thereby triggering the de-grouping charge.

Effectively, the above will trigger the reversal of the tax benefit in terms of the de-grouping and a greater capital gain on disposal of the debt or non-equity shares in terms of the zero base cost rule.

As a result, section 45(3B) was inserted with effect from 1 January 2021 which suspends the application of the zero base cost rule on the day on which the transferee and the transferor de-group/on application of the de-grouping provision.

The proposed 2021 amendments

During the 2021 Budget Speech, it has been proposed that the legislation be changed so that the zero base cost rule only apply for six years after the intra-group transaction, thereby aligning it with the period applicable to the de-grouping charge.

In keeping with the above, it has also been proposed that the legislation be amended so that the zero base cost rule ceases to apply when the early disposal provision applies.

Additionally, to avoid unduly adverse consequences triggered where a de-grouping occurs within 18 months and the transferee company sells the asset within 18 months (i.e. triggering the early disposal provision), it has been proposed that if the de-grouping charge has applied, the early-disposal provision will not.

We will await the draft tax law amendments to see how these changes will be legislated, but in general these are welcome and long overdue changes to section 45 intra-group transactions.