Property investors starting out tend to register all properties in their personal names. When their property investment business starts growing, the need arises for a better legal structure. But selling your property to your own company can be taxing. This is due to the sale of an asset like this is liable for capital gains tax.
What is a section 42 asset for share transfer?
Section 42 of the South African Income Tax Act provides for a mechanism whereby a company can transfer assets to a shareholder in exchange for shares in that company, without incurring immediate tax liabilities. 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?
Having your property in a holding company can be beneficial for multiple reasons. This could include tax reasons, paying lower taxes and ring-fencing your investments.
How could property investors use Section 42 asset for shares?
In the above scenarios, you might have a property in your own name but would want to take advantage of what your property company offers. Here are some scenarios where you would want to transfer the property into a company using section 42 asset for share transfers:
Using section 42 asset for share transfers for Section 13 sex
Section 13sex allows natural persons and legal entities, who have 5+ properties, to claim 50-100% back in tax breaks on all (or any) new or unused properties. The issue with 13sex is that you can’t sell the properties for 20 years, or you will be liable to pay back the whole tax break. Having your property in a company can thus be very beneficial if you want to sell the property company rather than the property, as it doesn’t trigger the clawback. Transferring existing properties into the company through asset for share means you can leverage the tax break without spending loads of money on capital gains tax.
Using section 42 asset for share transfers for 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.
When doing a section 42 asset for share investment property transfer, you will also not need to pay transfer tax or duties.
Requirements that must be met to qualify for section 42 asset for share 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 that 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 and must 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.
In conclusion, using section 42 asset for share transfer can be an excellent way for property investors 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.