The reach and implication of section 45(4)(b) of the Income Tax Act 58 of 1962

Abstract

Section 45 of the Income Tax Act1 provides a mechanism whereby a company may dispose of its assets to another company and defer the tax consequences thereof, if both companies form part of the same group of companies. Taxpayers seized the opportunity to manipulate the provisions of section 45 in order to enable a tax-free exit of their investments.2 The South African Revenue Service responded to this by introducing certain anti-avoidance measures.3 One of these anti-avoidance measures is the de-grouping charge in section 45(4)(b) of the Income Tax Act. This study aims to provide a critical analysis of the mechanics of section 45, the intended purpose of section 45(4)(b), how legislation should be interpreted and ultimately how far the implications of section 45(4)(b) reach.