I very occasionally run across an attorney who can both read and actually use his/her brain to interpret what he/she has read in the statutes and that happened this week. I owe this one to Cobus Welgemoed, Conveyancer who asked me this question –

If a new company issues 90 shares to a trust for R1 per share and then issues 10 shares to the founder in exchange for her/his fixed properties, then surely that satisfies s42 Asset for Share Swap. The trust then owns shares worth 90% of the value of the property and the founder owns the remaining 10% value in the form of shares.

At last! A solution as to how s42 can be used to shift properties into a trust without any taxes.

Cobus’ logic went against everything that I have said and written about the use of s42. I was excited. I didn’t mind being proved wrong because that’s when you really learn.

OK, so, one last look before I rewrite sections of two of my books, apologise to all those clients whom I have told that they cannot use s42 for this purpose and change my advice in future.

Firstly a very, very careful re-reading of s42 confirmed that the bove transaction complies with all the sections requirements.

But one thing niggled at me. The original owner of the properties ends up owning an asset (the shares) that are only worth 10% of what their properties were worth. and the trust ends up owning an asset worth 90% of that value for no consideraation. It just doesn’t make sense. And there’s the catch!

The players are connected parties and the transaction’s sole or main purpose was to obtain a tax benefit. It is therefore a s80A “impermissible avoidance agreement” and, under s80B, SARS can determine the consequences which could include any of Donations Tax, CGT and Transfer Duty.

Sadly, I had been right all along.