On 2 June 2011, National Treasury released the Draft Taxation Laws Amendment Bill 2011 for public comment (“the Bill”). Amongst the various amendments giving effect to the 2011 Budget Review tax proposals, the Bill also contains anti-avoidance measures one of which includes a proposed “suspension” of section 45 of the Income Tax Act with immediate effect.

Section 45 is frequently used by groups of companies wishing to transfer assets from one group company to another group company without triggering immediate tax consequences (which are effectively “rolled-over”). It has been proposed that section 45 be wholly suspended for a period of approximately 18 months commencing 3 June 2011. During this period, the section and the relief afforded will be re-evaluated amidst concerns that the section has been historically abused by companies which utilise the provision as part of “debt push-downs” which, Treasury believes, generates inflated interest deductions.  There is also a concern that the section has been used to transfer assets to companies with assessed losses.

The Media Statement released by the National Treasury states that the primarily purpose of section 45 is to ensure that the tax system (in particular the imposition of capital gains tax) does not pose a barrier to intra-group transfers regardless of whether the assets are exchanged for shares, debt, cash or as a dividend. National Treasury is of the view that  the section has rather historically been used to facilitate leveraged buy-outs so that interest on the debt incurred can be deducted. It is also stated that companies contemplating an acquisition have been using the section to move target assets to group companies with assessed losses which can then be applied against operating target company income. The Statement does not mention that section 45 is also used daily by many groups in reorganising their businesses legitimately and has become as essential tool in allowing company groups to operate efficiently.

National Treasury has made their proposals despite the fact that the Income Tax Act already contains a general anti-avoidance provision to deal with “avoidance” transactions of this nature. It is also unclear as to why National Treasury is considering suspending the section as whole, rather than introducing specific anti-avoidance legislation to cater for the abuse if they believe that the existing anti-avoidance measures are insufficient.

It certainly seems to be a case of “throwing the “baby out with the bath water”. Unfortunately many legitimate transactions will be impacted by this “sledgehammer approach”.

The proposed legislation will prevent section 45 from applying not only to intra-group transactions signed on or after 3 June 2011, but also to transactions concluded prior to the date but which are still subject to suspensive conditions that have not yet been fulfilled.

Groups that currently involved in section 45 transactions which have not yet been finalised or which are subject to suspensive conditions yet to be fulfilled, should contact us immediately in order to advise as to a suitable way forward. It is possible that most legitimate transactions can be restructured so that the tax roll-over relief is available without relying on the provisions of section 45. In particular, many transactions could qualify for the amalgamation/merger relief available under section 44 of the Income Tax Act or as “asset for share” transactions under section 42.