Various funding mechanisms exist, from notional vendor funding to simply issuing shares for nominal consideration. Often taxpayers are concerned regarding the manner in which the South African Revenue Service (SARS) will view these funding arrangements, and the option of applying to SARS for a binding private ruling (BPR) can assist with alleviating that concern. Recently, another one of these has come before SARS in the form of BPR400.

The applicant in BPR400 was a trust established to hold shares in a company (referred to as Company A) which in turn held shares in a listed company (ListCo). The beneficiaries of the applicant were employees of ListCo or other entities within its group, and therefore the applicant was used to facilitate the incentivisation of employees through providing indirect exposure to the economic benefit of holding shares in ListCo.

Corporate social investment trust

ListCo, however, wanted to increase its B-BBEE credentials further. It therefore devised a transaction whereby a corporate social investment trust (CSI trust) would be established to hold an indirect interest in it. The beneficiaries of the CSI trust would all be Black people for B-BBEE purposes, and the CSI trust would hold its interest in ListCo through Company A.

In order to facilitate this, ListCo (or another company in its group) would make a capital contribution to the applicant, which the applicant would use to subscribe for additional shares in Company A. Company A would then use the subscription proceeds to subscribe for more shares in ListCo. Following this, Company A would then issue shares for nominal consideration to the CSI trust.

Given that the shares issued by Company A to the CSI trust would have value at the time of issuing, the question with which the applicant approached SARS was whether this would constitute a donation to the CSI trust in terms of sections 55 or 58 of the Income Tax Act 58 of 1962 (ITA).

Section 55 defines a “donation” to be: “any gratuitous disposal of property including any gratuitous waiver of renunciation of a right”.

Section 58 then provides that:

“Where any property has been disposed of for a consideration which, in the opinion of [SARS], is not an adequate consideration that property shall … be deemed to have been disposed of under a donation.”

A similar question has been dealt with before by SARS in BPR343. In that ruling, the question was whether a company could issue shares to a trust at a discount for purposes of increasing its B-BBEE score. There SARS held that this issuing of shares would neither constitute a donation nor a deemed donation as defined in section 55 or section 58 of the ITA respectively. One should also bear in mind that the common law definition for a donation, as dealt with in the Estate Late Welch judgment, still applies alongside the definition in section 55.

BPR400

In BPR400, SARS merely ruled that the issuing of shares to the CSI trust for nominal consideration would not give rise to a donations tax liability under section 54 of the ITA. Although this is the charging section for donations tax, it does not necessarily mean that by implication SARS ruled that no donation (actual or deemed) would be made by Company A to the CSI trust.

SARS’ ruling in BPR400 is based on the assumption that the CSI trust is an approved public benefit organisation in terms of section 30 of the ITA and on the assumption that no beneficiary of the CSI trust is a connected person in relation to any beneficiary of the applicant.

Notably, SARS did state in BPR400 that it would not express a view as to whether the capital contribution made to the applicant (so as to enable the applicant to subscribe for additional shares in Company A) was deductible for tax purposes. In light of the court’s decision in Commissioner, SARS v Spur Group Proprietary Limited [2021] JDR 2530 (SCA) (discussed here), it is possible that contributions made to the applicant would be deductible to the extent these directly benefitted the ListCo employees.

BPR400 appears to indicate that the issue of shares at nominal value to increase a company’s B-BBEE credentials can be done without attracting donations tax. It appears to be similar to the decision in BPR 343 where the facts were slightly different but the outcome was similar. As BPRs are specific to an individual taxpayer, however, it is advisable that taxpayers looking to do this still seek professional advice based on the facts of their specific transaction so as not to fall foul of the donations tax (and other) provisions in the ITA.