BCR 079: Cancellation of share exchange
SARS has published BCR 079 which determines the tax consequences for former investors in one investment vehicle, who exchanged their participating shares for participating shares in another, who now wish to cancel the original share exchange and to be restored to the position they would have been in, had the share exchange not happened.
BCR 079 relates to a transaction whereby investors in an investment vehicle exchanged their shares for shares in another investment vehicle. The purpose of the transaction was to save costs for the shareholders. As part of the implementation of the transaction, shares held by the investors were effectively redeemed and cancelled. The capital gains tax consequences applying to the redemption for the investors were however not taken into account. As such the tax costs far outweighed the expected cost saving for the investors, thereby negating the entire business rationale for the redemption.
The parties involved therefore agreed in principle to cancel the redemption, by way of a reversal of the transaction, which involves a number of transaction steps proposed by the applicant to the BCR. It is noted by the applicant that following the reversal, all the shareholders will be in exactly the same economic position as they would have been in, had the redemption not taken place.
The ruling made by SARS notes that since the parties to the redemption are restored to exactly the same position they would have been in, had the transaction not taken place, and since they are the same parties that concluded the proposed cancellation and restitution transaction steps, the proposed transaction falls within the ambit of paragraph 11(2)(o) and paragraph 20(4) of the Eighth Schedule to the Income Tax Act (“IT Act”).
Based on the above, SARS made a class ruling by noting the tax consequences that will arise as a result of the proposed transaction and do so by differentiating between different types of investors and by noting that those investors whose year of assessment ended between the redemption effective date and the cancellation effective date would have to account for capital gains and losses realised as a result of the respective dates of the proposed transaction. The detail of the ruling made by SARS is set out in detail in the BCR.
Find a copy of BCR 079 here.
20/06/2022
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