Section 42: Asset-for-share transactions

It is often the case that South African tax resident shareholders wish to reorganise their South African group of companies, for a multitude of commercial reasons, without the ultimate shareholders changing. One of these could potentially be to create a single holding company structure. Various group relief provisions are contained in the Income Tax Act No 58 of 1962 (“the Act”) which can be utilised to reorganise group structures in a manner that is tax neutral, i.e., without immediate tax consequences for its underlying shareholders.

Section 42 of the Act is one such group reorganisation provision. Section 42 or ‘asset-for-share transaction’ allows shareholders to transfer their shares in a company (the assets that are being sold) to another company, in which the last-mentioned company will issue shares in return for the assets it received. The purchase consideration of the assets is effectively settled by the issue of shares and such a transaction is likely to qualify for roll-over capital gains tax relief provided that the requirement in section 42 is met. The effect of capital gains tax is deferred in such a transaction and will only be triggered once the assets are disposed of to a third party, outside of the group.

The requirements of section 42 can briefly be summarised as follows:

  • An asset must be disposed of to a resident company;
  • The market value of the asset disposed of must exceed or be equal to its base cost;
  • The issued shares must qualify as equity shares;
  • The transferor must hold a qualifying interest in the transferee at the close of the day of the asset-for-share transaction;
  • The asset disposed of must retain its nature (for example: if a transferor holds an asset as a capital asset the transferee must continue to hold the asset as a capital asset).

Provided that the requirements of an asset-for-share transaction are met, the relief afforded in section 42 will automatically find application unless the parties agree in writing that it does not apply. Furthermore, for a person (being the transferor) to hold a qualifying interest in the transferee the shares issued to the transferor need to constitute at least 10% of the equity shares and 10% of the voting rights in the transferee.

Section 42 contains a number of claw-back provisions which will not be discussed in detail for the purposes of this article. These clawbacks typically impose adverse tax consequences in circumstances where either the assets being acquired or shares being issued as part of the section 42 transaction are disposed of within a period of 18 months after having been so acquired. That notwithstanding, the application of the clawbacks is nuanced and it is important for parties to understand exactly when those clawbacks will apply.

This article is a general information sheet and should not be used or relied upon as 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 financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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IC Marais

Professional experience:

IC Marais is a certified CA (SA) with public sector and private sector technical knowledge based on 5 years’ Public Sector accounting, auditing and financial management experience and 5 years audit, tax and accounting experience. Detailed knowledge of private and public sector accounting and auditing standards (GRAP, IPSAS, IFRS, IAS, ISA) and public sector financial legislation (MFMA, etc.)

He enjoys the outdoors, hunting and fishing.


Professional experience:

In 1995, Schalk started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and then Mazars Moores Rowland in 2007) in Bloemfontein. In 1998, Schalk was appointed as manager at Moores Rowland, where he became a partner in 2003. Schalk received his Postgraduate Certificate in Advanced Taxation in 2006 and in 2009 he received his Certificate in the Administration of Estates.


Professional experience:

Cedric started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and Mazars Moores Rowland in 2007), Bloemfontein, in 1986. After completion of his articles, he joined the Special Investigations Division of the Department of Finance (SA Revenue Services) as a senior inspector from 1990 to 1991.


Professional experience:

Lucha started her career as a tax inspector at the Inland Revenue Department of New Zealand. After this she worked in commerce in Canada, Mexico and the United States.

On her return to South Africa, she completed her CA training contract with us and has been with Newtons ever since. She became a Partner in 2012.

Apart from her CA(SA) qualification she also holds a postgraduate certificate in Advanced Taxation (2005) and has the overall responsibility for training as our Training Officer.