Section 24BA of the Income Tax Act 58 of 1962 (“the Act”) serves as an anti-avoidance provision to address potential value-shifting arrangements as it pertains to asset for share transactions. Section 24BA makes provision for an event where a mismatch occurs in the value of an asset acquired and the value of the shares issued as consideration for that asset. In essence, it ensures that when a company acquires an asset by issuing shares, the “market value” of the asset must match the “market value” of the issued shares.

The Eighth Schedule of the Act provides for a broad definition of an “asset”, but it does not include currency as an asset. In terms of section 24BA(1), this means that the section is not applicable where shares are issued for cash. The section does, however, apply to an asset in the form of shares, which makes it applicable to share-for-share issues.

This section makes provision for two possibilities, namely:

1. When the value of the asset(s) exceeds the value of the shares received, as governed by section 24BA(3)(a).
2. When the value of the shares is more than the value of the asset(s) received, as governed by section 24BA(3)(b).

In terms of section 24BA(3)(a) of the Act, if the asset(s) transferred to the company are worth more than the value of the shares issued, the company issuing the shares is deemed to have a capital gain equal to the amount by which the value of the asset(s) exceeds the value of the shares. In addition, the person transferring the asset(s) will be required to reduce the base cost of the shares by the capital gain. By way of an example, if Mr B transferred an asset with a market value of R100.00 to Company A, and Company A issues shares to Mr B with a market value of R90.00, Company A would have a capital gain of R10, while Mr B would have had to reduce the base cost in the shares by R10.00 to R90.00.

The converse is also applicable in terms of section 24BA(3)(b) of the Act. If the asset(s) transferred have a lower value than the shares issued, the company issuing the shares must account for a deemed dividend in specie for the amount by which the value of the shares exceeds the value of the asset(s). This means that if Company A issues shares with a market value of R100.00 to Mr B, and Company A receives an asset with a market value of R90.00 from Mr B, Company A would be deemed to have declared and paid a dividend in specie of R10.00 to Mr B.

It is important to note that the asset-for-share transaction is concluded on a value-for-value basis. The provisions of section 24BA are grounded on the market value of the assets before the conclusion of the transaction and the market value of the shares issued after the conclusion of the transaction. Thus, a valuation of both the share value and the asset value is required to ensure that the requirements of section 24BA are complied with.

There are limited instances, however, where the application of section 24BA would not apply. These include instances when – 

1. A company issues shares to another company in exchange for an asset, and after such issue, the two companies form part of the same group of companies.
2. The transferor of the asset will hold all the shares in the company immediately after the acquisition; and
3. paragraph 38 of the Eighth Schedule applies to the transfer, which means that the transfer occurs between connected persons, and it is deemed to be at market value.

Section 24BA of the Act aims to circumvent the occurrence of value mismatches in asset-for-share transactions. Its operation is grounded on enforcing value equivalence, and failure to ensure that a transaction falls within the ambit of section 24BA of the Act may have possible tax consequences. 

It is therefore vital to involve corporate or tax advisors to guide you on the correct treatment when structuring your commercial transaction and avoid falling foul of section 24BA.