Treasury’s proposal will act as disincentive to unbundle, says tax expert
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New proposals for the tax treatment of unbundling transactions will have a dampening effect on this form of corporate restructuring, PwC tax policy leader Kyle Mandy believes.
The proposed change will make it more difficult for a company to qualify for unbundling tax relief than is currently the case and act as a disincentive to unbundle when this is an important mechanism to reduce the high level of concentration in the economy and its ownership in a few hands.
Unbundling is also a way to unlock the value of a group’s underlying subsidiaries so that it is reflected in the share price. This is particularly pertinent in a stagnant share market.
The proposal is contained in the draft Taxation Laws Amendment Bill, which is before parliament’s standing committee on finance.
The Treasury and Sars briefed the committee on the bill as well the draft Tax Administration Laws Amendment Bill on Wednesday.
Under the current dispensation, corporate reorganisation rules allow for the tax-neutral transfer of assets between companies that are part of the same group. Various taxes can be imposed on unbundling including capital gains tax, securities transfer and dividends tax.
The Treasury chief director of legal tax design, Yanga Mputa, explained to MPs during the briefing that the rollover tax relief on unbundling is subject to an anti-avoidance measure aimed at limiting or discouraging tax avoidance and closing a tax loophole.
The tax relief is only granted if after the unbunding no single disqualified person (such as a nonresident or tax-exempt entity) either alone or together with any connected person (who is also a disqualified person) holds 20% or more of the shares in the unbundled company.
Mputa explained that the rationale for excluding nonresidents was that they are outside the SA tax net, which meant that the tax deferral provided in the relief became a tax exemption.
Under the proposed amendment, if the stake of all the tax-exempt shareholders in aggregate adds up to 20% or more, the company will not benefit from the unbundling tax relief. The reference to the connected person test is removed.
Controversially, the Treasury has proposed that this proposal take retrospective effect from July 31 when the draft bills were published for public comment. Mputa said a lot of comments had been received objecting to this retrospectiveness of the proposal.
Mandy pointed out in an interview that the proposal went far beyond just nonresident ...
The proposed change will make it more difficult for a company to qualify for unbundling tax relief than is currently the case and act as a disincentive to unbundle when this is an important mechanism to reduce the high level of concentration in the economy and its ownership in a few hands.
Unbundling is also a way to unlock the value of a group’s underlying subsidiaries so that it is reflected in the share price. This is particularly pertinent in a stagnant share market.
The proposal is contained in the draft Taxation Laws Amendment Bill, which is before parliament’s standing committee on finance.
The Treasury and Sars briefed the committee on the bill as well the draft Tax Administration Laws Amendment Bill on Wednesday.
Under the current dispensation, corporate reorganisation rules allow for the tax-neutral transfer of assets between companies that are part of the same group. Various taxes can be imposed on unbundling including capital gains tax, securities transfer and dividends tax.
The Treasury chief director of legal tax design, Yanga Mputa, explained to MPs during the briefing that the rollover tax relief on unbundling is subject to an anti-avoidance measure aimed at limiting or discouraging tax avoidance and closing a tax loophole.
The tax relief is only granted if after the unbunding no single disqualified person (such as a nonresident or tax-exempt entity) either alone or together with any connected person (who is also a disqualified person) holds 20% or more of the shares in the unbundled company.
Mputa explained that the rationale for excluding nonresidents was that they are outside the SA tax net, which meant that the tax deferral provided in the relief became a tax exemption.
Under the proposed amendment, if the stake of all the tax-exempt shareholders in aggregate adds up to 20% or more, the company will not benefit from the unbundling tax relief. The reference to the connected person test is removed.
Controversially, the Treasury has proposed that this proposal take retrospective effect from July 31 when the draft bills were published for public comment. Mputa said a lot of comments had been received objecting to this retrospectiveness of the proposal.
Mandy pointed out in an interview that the proposal went far beyond just nonresident ...
