It seems that the legislative authorities have at last appreciated that a number of issues have arisen pursuant to the introduction of the new Companies Act 2008 on 1 May 2011. The introduction of the Companies Act has given rise to a number of anomalies and new concepts which have not been dealt with in the context of tax law to date. For instance, the Companies Act deals with a concept called "distributions", whereas the fiscal laws still refers to "a dividend" distributed to shareholders.

One of the issues that has not been addressed to date, relates to the ability of a company to issue so-called "sweat equity" to shareholders in circumstances where the initial subscription price is not paid for such subscription on day one. In terms of section 40 of the Companies Act, the subscription price can be delayed or can be settled through means of the rendering of future services, future benefits or future payment by the shareholder. Unfortunately the ability to receive the shares immediately, results in an upfront tax liability for the subscriber to the extent that it is acknowledged that the shares are acquired for future services. Also it is not clear at this point in time whether the issue of shares by a company would actually constitute expenditure actually incurred by the company should these shares be issued for future services.

In the tax proposals issued by National Treasury it is indicated that an immediate focus area will also relate to company reorganisations and other share restructurings. Share-for-share recapitalisations of a single company will enjoy an immediate focus. Currently share-for-share transactions are dealt with in terms of section 42 of the Income Tax Act on the basis that rollover relief is afforded to shareholders to the extent that a shareholder acquires a 20% equity shareholding in the acquiror company pursuant to the disposal of assets to the acquiror company. The amalgamation provisions of the Companies Act are also not consistent with those incorporated in section 44 of the Income Tax Act, especially given the fact that section 44 of the Income Tax Act does not deal with the transfer of liabilities whereas the amalgamation provisions in the Companies Act deal specifically with the merging of assets as well as liabilities of the merging companies.

Written by Emil Brincker, Director, National Practice Head, Tax, Cliffe Dekker Hofmeyr