Section 45 of the Income Tax Act 58 of 1962 (the Act) enables companies within a group of companies as defined in s 41 to transfer assets between one another on a tax-neutral basis. Section 45(3A) and (3B) contain the so-called nil base cost rule.
Before examining this rule, anyone intending to use s 45 should bear two things in mind:
First, be aware that s 45, and for that matter, the rest of the corporate rules, must be read with the definitions in s 41. In fact, it is a good idea to read the whole of s 41 before reading any of the corporate rules in ss 42 to 47.
Secondly, when reading any corporate rule, read the entire section and not just the first few subsections. The exclusions are normally contained further down in the section and worth checking first. Section 45(6) contains the circumstances in which s 45 does not apply. Many of these exceptions are aimed at driving the taxpayer into other corporate rules which the fiscus regards as more appropriate. Section 45(6)(f) prohibits a treasury company from disposing of its holding company's shares to the holding company. Section 45 applies automatically but the parties can elect out of its provisions in writing under s 45(6)(g).
The nil base cost rule
Section 45(3A) provides as follows:
'(3A)
(a)
This subsection applies where an asset is acquired by a transferee company from a transferor company in terms of an intra-group transaction and—
(i)
any amount incurred by that transferee company as consideration for the acquisition of that asset from that transferor company is funded directly or indirectly by the issue of any debt or share other than an equity share; and
(ii)
that debt or share—
(aa)
is issued by a company that forms part of the same group of companies as the transferee company or the transferor company; and
(bb)
is issued or used for the purposes of directly or indirectly facilitating or funding that intra-group transaction.
(b)
The holder of any debt or share contemplated in paragraph (
a) who is part of the same group of companies as the issuer of that debt or share must, for the purposes of—
(i)
paragraph 20 of the Eighth Schedule, be deemed to have acquired that debt or share for an amount of expenditure of nil; and
(ii)
section 11(a) or 22(1) or (2), be deemed to have acquired that debt or share for an amount of expenditure or cost of nil.
(c)
Where an amount, other than an amount of interest or an amount previously taken into account as interest, is received by or accrues to a holder in respect of a debt contemplated in paragraph (a) from any company that forms part of the same group of companies, as defined in section 1, as that holder and that amount is applied by the holder in settlement of the amount outstanding in respect of that debt, that amount must be disregarded in determining the aggregate capital gain or the taxable income of that holder to the extent that that amount reduces the liability of the issuer of that debt to that holder.
(d)
Where an amount, other than an amount that constitutes a dividend or an amount previously taken into account as a dividend, is received by or accrued to a holder in respect of a share contemplated in paragraph (a) from any company that forms part of the same group of companies as that holder and that amount is applied in reduction of the capital subscribed for that share, that amount must be disregarded in determining the aggregate capital gain or the taxable income of that holder.'
The following example has been adapted from the Explanatory Memorandum on the Taxation Laws Amendment Bill, 2011, which inserted s 45(3A):
EXAMPLE — Intra-group transaction involving the sale of an asset on loan account
Facts:
Parent Co owns all the shares of Sub A and Sub B. Sub A and Sub B are part of the same group of companies as defined in s 41(1). Sub B wants to acquire some of the assets of Sub A with a market value of R80 million, and a tax value of R50 million. Sub A transfers the assets to Sub B. Sub B issues an interest-free loan of R80 million to Sub A in consideration for the acquisition of the assets.
Result:
The transaction will qualify for the intra-group transaction relief. Sub A will be deemed to have a tax cost of nil in respect of the loan. To the extent that Sub A and Sub B are still members of the same group of companies, any gain or income realised by Sub A as repayment of the loan principal will be disregarded for the purposes of determining Sub A's capital gain and income.
In the absence of the nil base cost rule, Sub A would have had a base cost in the loan of R80 million, and not R50 million, the base cost of its asset. Sub A could then have cashed out by ceding the loan to a third party for R80 million, thus effectively dodging the tax consequences that would have arisen had it sold the asset at market value.
Under s 45(3A)(b), if Sub B pays Sub A R10 million, Sub A will have a capital gain of R10 million (proceeds of R10 million less a base cost of nil). However, under s 45(3A)(c) loan repayments must be disregarded in determining an aggregate capital gain. If the transferor is a money lender, the loan repayments will have no impact on its taxable income.
Section 45(3A)(c) excludes from its ambit 'an amount of interest or an amount previously taken into account as interest'. The purpose of this exclusion seems to be to separate repayments of the principal from payments of capitalised interest. Capitalised interest does not receive the nil base cost treatment because it is not part of the loan used by the transferee company to acquire the asset. Capitalised interest would receive base cost equal to the personal right to claim interest which is given up when the loan account is correspondingly increased. When the interest debt is settled, there should be no capital gain or loss.
Section 45(3A) also applies to non-equity share funding, that is, shares which are restricted both as to their dividend yield as well as the capital to be returned on winding-up. Such shares are also deemed to have a base cost of nil. When an amount is received by or accrues to the holder of the share which constitutes a return of capital, any capital gain that would arise under para 76B must be disregarded under s 45(3A)(d). If the shares are held as trading stock, any return of capital included in taxable income must likewise be disregarded under s 45(3A)(d). Excluded from this rule is a dividend or an amount previously taken into account as a dividend. As with interest on a debt, dividends are excluded from s 45(3A)(d) in order to separate them from returns of capital. Since any unpaid dividends are not part of the acquisition cost of the asset acquired by the transferee under s 45(3A)(a), they are not subject to the nil base cost treatment. An unpaid dividend debt asset would have base cost equal to the market value of the personal right to claim the dividend which is given up upon accrual, and when the debt is settled, there should be no capital gain.
The disposal of the debt or share otherwise than through repayment will thus give rise to a capital gain, or in the case of debt or shares held as trading stock, to an inclusion in taxable income.
Section 45(3B)
Section 45(3B) provides deemed expenditure for the debt or shares referred to in s 45(3A) when
- the transferee company ceases within a period of six years from the date of acquisition in relation to the transferor company or a controlled group company in relation to the transferor company to form part of the same group of companies under s 45(4). Also included here is any deemed de-grouping under s 45(4B);
- the transferee company and the transferor company still form part of the same group of companies on the sixth anniversary of the acquisition; or
- the transferee company disposes of the asset outside the corporate rules in ss 42 to 47.
The expenditure on a debt is equal to its face value less any repayments after the date of acquisition. The expenditure on a share is equal to its subscription price less any returns of capital applied in reduction of the expenditure, for example, under para 76B for a share held on capital account.
The expenditure is, however, limited to expenditure that funded the acquisition of an asset acquired under s 45.
Conclusion
When an intra-group transaction under s 45 is undertaken in exchange for debt or non-equity shares issued by the transferee, it will have a tax cost of nil. If the principal or subscription price is simply repaid, no adverse tax consequences arise.
Deemed expenditure will be granted when a de-grouping within six years occurs, transferor and transferee remain part of the same group for six years while the debt or share is held, or the transferee disposes of the asset that was the subject of the s 45 transaction. It will, however, be limited to expenditure that funded the acquisition of the asset disposed of under s 45. The disposal of the debt or share to a third party within six years will, however, have adverse tax consequences because of the nil base cost rule.
This article was first published by ASA in its
August 2025 issue.
