The Income Tax Act contains various provisions in terms of which transactions can occur between specified parties without adverse tax consequences being incurred in respect of those transactions. These provisions are contained in sections 41 to 47 of the Income Tax Act and are generally known as the “group relief provisions”.
Apart from certain value-shifting and general anti-avoidance provisions, the group relief mechanisms override all other sections of the Income Tax Act to the extent that there are any inconsistencies. These transactions are asset-for-share transactions, amalgamations, intra-group transactions, and liquidation distributions. It is critical to know in which circumstances which transactions apply.
In what follows, we highlight one of the particular types of transactions with reference to its purpose, working and certain clawbacks which may apply in respect of this transaction.
Section 45 Intra-group transactions
In terms of a section 45 intra-group transaction, companies that form part of the same group of companies are allowed to transfer assets between those companies without incurring an immediate tax cost. The tax that would have arisen on the disposal of such an asset is deferred until such a time that the receiving company eventually disposes of that asset.
The basic requirement is that those companies must form part of the same group of companies, which entails sharing at least a 70% shareholding with a common shareholder company.
The transferor company does not recognise a capital gain in respect of the asset transferred, or where the asset was an allowance asset, or an asset held as trading stock, the tax consequences attached to the disposal of that asset would also not be incurred in the same way, as when such a transaction takes place outside of the group relief provisions. Any cost basis of the asset is rolled forward along with that asset to the transferee company.
The exchange mechanism for the asset can either be a debt issued by that company (i.e. on loan account), non-equity shares, or a donation (section 45 notes that any transaction between such a group of companies can be regarded as an intragroup transaction).
When it comes to clawbacks, section 45 is arguably the most onerous of the group relief provisions in that the relevant clawbacks can apply for up to six years in respect of such a transaction. Most notably, where such a transferor and transferee company should seize to form part of the same group of companies within six years after the transaction, a so-called de-grouping charge triggers, which is essentially a realisation of the tax that would have been paid in respect of that asset that was previously transferred on tax neutral basis.
Although section 45 is a mechanism to achieve specific outcomes within groups of companies, its mechanics are very complex, and we strongly advise that professional tax advice be sought before implementation of any such transactions.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).