The distribution of shares in an unbundling transaction – Binding class ruling 37

The distribution of shares in an unbundling transaction – Binding class ruling 37.

Written by Danielle Botha, Associate, Tax, Cliffe Dekker Hofmeyr


BCR 37, dated 23 January 2013, dealt with the question of whether the transfer of equity shares in an unbundling transaction will be exempt from dividends tax and securities transfer tax (STT) in the hands of the shareholder.

The Applicant was a listed public company and the Co-Applicant a private company, both of which were incorporated as residents in South Africa. The Co-Applicant was a wholly-owned subsidiary of the Applicant. The Applicant wanted to transfer its shares in the Co-Applicant to its own shareholders. Subsequent to the transfer of the equities to the Applicant’s shareholders, the Co-Applicant would establish a primary listing on the Johannesburg Stock Exchange and a secondary listing on the New York Stock Exchange of depository receipts, which could potentially have affected the application of s46 of the ITA..

The South African Revenue Service (SARS) confirmed that the transaction constituted an unbundling transaction in terms of s46(1) of the Income Tax Act, No 58 of 1962 (ITA). Section 46(1) defines an unbundling transaction as any transaction in terms of which an ‘unbundling’ company, in this case the Applicant, transfers its full equity shareholding in an ‘unbundled’ company, the Co-Applicant, to its shareholders in accordance with the effective interest held by the shareholders in the unbundling company. In terms of the definition of an ‘unbundling transaction’, s46(1)(a) provides for a resident unbundling in which both companies are required to be South African residents, as in the present instance.

SARS ruled that the distribution of the Applicant’s shares would be disregarded for purposes of determining dividends tax, as described under s46(5) of the ITA and furthermore that the distribution would be exempt from STT under s8(1)(a)(iv) of the STT Act.

Section 46(3) of the ITA requires that shareholders of the unbundling company, allocate part of the base cost of the shares held in the unbundling company (old shares), to the shares now also held in the unbundled company (new shares). The new shares are deemed to have been acquired on the same date as the old shares. The base cost of the new shares is calculated based on a formula.


Legal tips and updates by Rose Attorneys, Cape Town

Most written agreements end off with a number of “boilerplate” clauses, being the small print that is usually glossed over. These are standardised clauses which deal with general matters and appear in most contracts, regardless of whether the specific agreement concerns a simple sale of apples or the manufacture of jet planes worth billions of rands.

Examples include clauses about severability, the whole agreement, variation, disputes, jurisdiction and so on.
These clauses are often clumsily drafted in high legalese. For the sake of covering all bases, they may go on much longer than is strictly necessary.
This series of updates seeks to decode the legalese in some of the most common boilerplate clauses.
Towards the end of most agreements, one comes across words to the following effect under the heading “SEVERABILITY“:

Except as expressly provided to the contrary herein, each paragraph, clause, term, and provision of this AGREEMENT…

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