Section 46 of the Income Tax Act, 58 of 1962 (herein the ”ITA”) defines a ”Unbundling Transaction”  to mean any transaction in terms whereof the equity shares in a company (usually referred to as the ”Unbundled Company”), and held by another company (traditionally the ”Unbundling Company”), is distributed by the Unbundling Company, to its shareholders, proportionate to their shareholding in the Unbundling Company.

An Unbundling Transaction, in compliance with section 46 of the ITA, does not give rise to capital gains tax, dividends tax or securities transfer tax. By way of schematic presentation:

The ITA caters for three types of unbundling transactions, being:

  • The unbundling of shares in a listed entity;
  • The unbundling of shares in an unlisted entity; and
  • The unbundling of shares in any company pursuant to an order in terms of the Competition Act.

A distribution of unlisted shares by an Unbundling Company, will qualify for the tax roll-over relief if:

  • The Unbundling Company (i.e. Company A per example above) holds more than 50% of the equity shares in the Unbundled Company (i.e. Company B in the example above) and all of the equity shares so held, are distributed to the shareholders of Company A; and
  • the shareholders of Company A are resident companies and form part of the same ‘group of companies’ with Company A.

Section 1 of the ITA defines a ‘group of companies’ for purposes of section 46 of the ITA, as two or more companies in which one company (usually the ”Controlling Company”) directly or indirectly holds shares in at least one other company (referred to as the ”Controlled Group Company”), and provided that at least 70% of the equity shares in the Controlled Group Company/ies are held directly by the Controlling Group Company.

The question that was heavily debated in the past is whether, in the event where there is a shareholder of the Unbundling Company (with respect to an unbundling transaction of unlisted shares), that does not form part of the same group of companies as the Unbundling Company (i.e. being a ”Non-Qualifying Shareholder” in the sense that it does not hold 70% or more of the shares in the Unbundling Company), would nullify the unbundling transaction in terms of section 46 in totality; or would the roll-over relief only apply in respect of the ”Qualifying Shareholder” (i.e. the shareholder that does hold 70% or more of the shares in the Unbundling Company).

At last the South African Revenue Service (SARS) provided clarity in respect of the debate per Binding General Ruling 54 (the ”Ruling”). The Ruling provides clarity on the implications of an unbundling transaction where the Unbundling Company has non-qualifying shareholders and such non qualifying shareholders receive unbundled shares from an unlisted Unbundled Company.

The Ruling concluded that the intent of section 46 of the ITA is to allow for the distribution of unlisted shares to Qualifying Shareholders only, thereby excluding Non-Qualifying Shareholders from the relief provided by section 46 for unbundling transactions. The Ruling further states that the presence of Non-Qualifying Shareholders in an unbundling transaction of unlisted shares, does not invalidate the entire unbundling transaction, but only that portion relating to the Non-Qualifying Shareholders. Consequently, the tax implications of the unbundling transaction for Non-Qualifying Shareholders must be dealt with outside of the provisions of section 46 of the ITA under general tax principles.

For more information about our Corporate and Commercial Law Services, contact:

Derek Brits (LLB, LLM, HDip. Tax)

T: (012) 361 5001

M: (082) 451 6535


Derek specialises in private equity mergers and acquisitions and is experienced in transactional work. Derek also advises on aspects of the Companies Act, Competition Act and corporate tax structures.

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

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