If you registered your first property in tour own name – then you’re not alone. But now your property portfolio has grown. And you need less liability. How do you get the property into a company? You can use a Section 42 Asset for share transfer. You will avoid transfer tax and capital gains tax.
What is a section 42 asset for share transfer?
Section 42 enables you to transfer money-generating assets from your own name into a company. The natural person will exchange their asset for shares in the company. They will therefore become a shareholder in the company.
No immediate tax liabilities will be incurred. This means that the company will gain the asset and the other party will gain shares in the company.
This process is known as an asset for share transaction.
Why do you want your property in a holding company in the first place?
You save on tax. You have limited liability.
Company tax is only 27%. Personal income tax is up to 45%. Companies is an easy way to pay lower taxes. You can also let the money grow at a lower tax rate and only withdraw the money when you retire.
You also ring-fence your investments and have limited liability.
Having your property in a holding company can be beneficial!
How do property investors use Section 42 asset for shares?
If your property is an asset that’s generating cash, then you can use this mechanism. Here are some scenarios where you would want to transfer the property into a company using section 42 of income tax act asset for share transfers:
Using Section 42 asset for share transfers for Section 13 sex
Americans have property depreciation. We have Section 13sex. The issue is that the owners aren’t allowed to change during the entire 20 years. This restriction applies while the tax break is in effect. If the owner changes, then the full tax break needs to be paid back. It’s called a clawback.
If you use a Section 42 transfer, then no clawbacks will apply.
Using section 42 asset for share transfers to lowering costs
Companies are separate legal entities that are detached from you. If you would want to ring-fence your investments to make them grow at a lower tax break, then this could benefit you. If you’re in a higher tax bracket than the 27%, you are able to ringfence your investments for future growth at a lower tax rate. If doing a Section 42 transfer, you:
- Don’t pay transfer duties
- Don’t pay capital gains tax
- Save on lawyer fees
There will obviously be some lawyer costs involved – but generally a lot less.
How do I qualify for a Section 42 transfer?
Imagine I want to trade in my coffee cup collection for shares. That doesn’t make sense, does it? To avoid this, SARS have certain rules and requirements to qualify:
- You can be either a company or a natural person who transfers it for shares in a company.
- Business: The assets being transferred must be used in the course of carrying on a trade,
- The transfer must be part of something bigger – basically, a merger to something to make a bigger company. this is legally referred to as “for the purpose of the incorporation of a new company or the amalgamation of two or more companies”
- Goodwill, trademarks, and patents are not eligible for transfer.
- The assets must be revenue-generating, depreciable, or amortisable. They must also be used in the production of income. Excellent, so we can do property.
- At least 85% of the shares issued as consideration for the transfer must be issued to you (as the transferring company).
- You must hold those shares as capital assets for at least 36 months (3 years) after the transaction.
What is the process of transferring assets for shares?
Though you will need a lawyer and very intelligent people to do the asset for share transfer, the steps below will give you an idea about what is required:
- Obtain a valuation of the assets: This will determine the base cost of the assets for the new company.
- Draft the agreement: The transferor and the transferee must agree on the terms and conditions of the transfer, the value of the assets, and the number of shares to be issued.
- Approve the transaction: Both parties (individuals, directors, shareholders, etc.) need to approve the transaction.
- File the necessary documentation: The necessary documentation, such as the agreement and valuation report, must be filed with the Companies and Intellectual Property Commission (CIPC) within 15 days of the transaction.
- Issue the shares: Once the CIPC has approved the transaction, the transferee company must issue the shares to the transferor company.
- Record the transaction: The transaction must be recorded in the accounting records of both companies.
Conclusion
Using Section 42 asset for share transfer can be an excellent method for property investors. It allows them to transfer assets into a company without incurring immediate tax liabilities. This can provide benefits such as tax breaks, ring-fencing investments, and lowering costs.
However, to qualify, there are specific requirements that must be met, and the process can be complex. It’s essential to work with experienced professionals and obtain a valuation of assets, draft an agreement, approve the transaction, file necessary documentation, issue shares, and record the transaction. By following these steps, property investors can take advantage of the benefits of having their property in a holding company and avoid unnecessary tax liabilities.
Happy investing!
