Why moving an asset normally triggers tax
You cannot simply slide a property into a company for free. For tax purposes, transferring an asset is a disposal, and a transfer to a connected company is treated as happening at full market value even if no money changes hands. Left alone, that would crystallise the whole built-in gain immediately.
“… a disposal is any event, act, forbearance or operation of law which results in the creation, variation, transfer or extinction of an asset…”
“… where a person disposed of an asset … to a person who is a connected person … for a consideration which does not reflect an arm’s length price… the person who disposed of that asset must be treated as having disposed of that asset for an amount received or accrued equal to the market value…”
The corporate roll-over rules in Part III of the Act (sections 41 to 47) exist precisely to remove this immediate tax when a genuine reorganisation takes place, by deferring the gain instead of forgiving it. Section 42 is the one that fits a family structure. See the full roll-over toolkit (ss 41–47) at Corporate Roll-Over Relief.
What section 42 does
Section 42 lets a person hand an asset to a resident company and receive shares in return, with no immediate tax, provided the person ends up holding a qualifying interest in that company. The asset’s market value must be at least its base cost (you cannot use it to lock in a loss).
““asset-for-share transaction” means any transaction— (a)(i) in terms of which a person disposes of an asset …, the market value of which is equal to or exceeds— (aa) in the case of an asset held as a capital asset, the base cost of that asset on the date of that disposal …, to a company which is a resident…”
Where it applies, the relief deems the transferor to have disposed of the asset at its base cost — so no gain arises now — and the company takes over that same base cost:
“… where a person disposes of an asset to a company in terms of an asset-for-share transaction— (a) that person must be deemed to have— (i) disposed of that asset— (aa) … for an amount equal to the base cost …”
Step 1 of 4 · Before
The qualifying-interest test
The relief is only available if, at the close of the day, the transferor holds a qualifying interest. For a private (unlisted) company the test is at least 10% of the equity shares and at least 10% of the voting rights. A founder who takes 100% of a new Newco is comfortably over that line.
““qualifying interest” of a person means— (a) an equity share held by that person in a company which is a listed company …; (c) equity shares held by that person in a company that constitute at least 10 per cent of the equity shares and that confer at least 10 per cent of the voting rights…”
Note the residency point: it is the company receiving the asset that must be a South African resident. Section 42 does not impose a blanket residency requirement on the transferor for the basic capital-asset roll-over — but cross-border facts bring their own limits (the definition’s foreign-company limbs, source rules and South African tax-base requirements can prevent or restrict relief), so a non-resident transferor needs specific advice.
Note — the Taxation Laws Amendment Act 5 of 2026 changes s 42 in two waves. From 1 January 2027 (transactions from that date) it deletes paragraphs (b) and (e) of the “qualifying interest” definition (the collective-investment-scheme and hedge-fund-portfolio limbs) and removes CIS portfolios from the s 42 regime generally (the s 41 definitions of “company” and “equity share” are narrowed to s 44 only). Separately, the Act contains limited listed-company threshold wording with earlier effect (years of assessment commencing on or after 1 January 2026). For the family structure — the 10%/10% unlisted-company test in paragraph (c) — nothing changes; for a listed-share transaction, check the Act’s commencement provisions for the exact wording that applies on your implementation date.
The value trap: section 24BA
Section 42 defers the gain — but it does not switch off section 24BA, which s 41(2) expressly preserves. Section 24BA applies where the asset and the shares issued for it have mismatched values compared to an arm’s-length exchange. If the asset is worth more than the shares, the excess is a deemed capital gain in the company (and the shareholder’s base cost is cut); if the shares are worth more than the asset, the excess is a deemed dividend in specie.
Two escape hatches carry the typical founder through: s 24BA stands down where the parties are in the same group of companies immediately after the transaction, or where the transferor holds all the shares in the company immediately after (s 24BA(4)). Thabo taking 100% of Newco is safe. But the moment the roll-in happens alongside other shareholders — the trust subscribing at the same time, a sibling taking a stake — the values must genuinely balance, supported by a proper valuation. The full rule, with the rest of the s 41(2) carve-out list, is unpacked in The Rules that Override Roll-Over Relief.
Worked example: Thabo moves the property into Newco
Getting the shares to the trust: the two-step friction
Section 42 gives the shares to the founder, but the plan needs the trust to hold them. So a second transaction is required: the founder either sells the shares to the trust (creating a loan account, which triggers section 7C) or donates them (attracting donations tax). Moving the shares is itself a disposal that attracts securities transfer tax (0.25%) unless a roll-over exemption applies.
“s 2(1): There must be levied and paid for the benefit of the National Revenue Fund a tax… in respect of every transfer of any security issued by— (a) a close corporation or company incorporated… at the rate of 0,25 per cent of the taxable amount…”
Note — STT applies to a transfer of shares (an issue of new shares is not a transfer), so the second step — moving the Newco shares to the trust — is what is exposed, not the original section 42 roll-in. The s 8(1)(a)(i) relief only covers a transfer made under another section 42 transaction; a plain sale or donation of the shares to the trust is not exempt and attracts the 0,25% on the taxable amount.
The 18-month rules
Two anti-avoidance subsections watch the 18 months after a section 42 transaction. It is important to read them precisely, because the headline danger is often overstated. (A third 18-month regime — the extraordinary-dividend rules in para 43A of the Eighth Schedule — matters where a company later sells shares it acquired in a roll-over: exempt dividends within 18 months of that sale can be added back to proceeds, and the dividend history travels through s 42 transactions to connected acquirers. See Dividend Stripping & the 18-Month Web.)
Section 42(5): selling the shares within 18 months
“(5) Where a person— (a) acquired any equity share in a company in terms of an asset-for-share transaction; and (b) disposes of any such equity share… within a period of 18 months after the date of acquisition… and immediately prior to that disposal more than 50 per cent of the market value of all the assets disposed of by that person to that company… is attributable to allowance assets or trading stock or both…”
Note — The trigger is conjunctive: the share must have been acquired in an asset-for-share transaction and disposed of within 18 months and the >50% allowance-asset / trading-stock test must be met immediately before the disposal. The income inclusion is capped at the share’s market value at the start of the 18-month period. Wording unchanged by the 2023 and 2024 Taxation Laws Amendment Acts (both touched only s 42(1)); the 2026 Act’s s 42 amendments likewise leave s 42(5) untouched.
Read the gate carefully: the ordinary-income recharacterisation only applies where more than 50% of the market value of the assets originally disposed of is attributable to allowance assets or trading stock immediately before the share disposal. The test depends on the tax character of the assets — a rental property held on capital account is not trading stock, but it can still be an allowance asset if building or other tax allowances were claimed or are available on it. Check the property’s full allowance history before concluding that s 42(5) does not apply. And note what the rule does even where it bites: it does not undo the original s 42 roll-over — it creates an income inclusion when the replacement shares are disposed of.
Section 42(7): the company on-sells the asset within 18 months
“(7) Where a company disposes of an asset… within a period of 18 months after acquiring that asset in terms of an asset-for-share transaction, and— (a) that asset constitutes a capital asset, so much of any capital gain determined in respect of the disposal of that asset as does not exceed the amount that would have been determined had that asset been disposed of at the beginning of that period of 18 months for proceeds equal to the market value of that asset as at that date…”
Note — The words preceding para (a) were substituted by s 40 of the Taxation Laws Amendment Act 34 of 2019 (effective 15 January 2020); para (a) carries no later amendment, so this is the current in-force wording.
Frequently asked questions
It is a roll-over relief in the Income Tax Act 58 of 1962. You hand an asset to a resident company and it issues you equity shares in return. If you hold a qualifying interest afterwards (for an unlisted company, at least 10% of the equity shares and voting rights), no immediate CGT arises — the gain is deferred, not forgiven, because the company takes over your base cost.
No — it defers the CGT, it does not forgive it. The company inherits your base cost, so the built-in gain is taxed when the company later sells. Section 42 also does not, on its own, deal with transfer duty or VAT or get the shares into the trust.
Often not, where the asset is capital-held property with no allowance history — but verify the facts first. The s 42(5) ordinary-income rule only bites where, just before you dispose of the shares, more than 50% of the value of the assets originally rolled in is attributable to allowance assets or trading stock. A capital-held rental is not trading stock, but it can be an allowance asset if building or other allowances were claimed or available — confirm the allowance history before relying on this. The other 18-month risk is s 42(7): if the company on-sells the property within 18 months, the gain for that period is quarantined. Letting the 18 months run before moving the shares is still the conservative practice.
The company receiving the asset must be a South African tax resident. Section 42 does not impose a blanket residency requirement on the person transferring the asset for the basic capital-asset roll-over — but where the transferor is non-resident, the cross-border limbs of the definition, source rules and South African tax-base requirements can prevent or limit relief, so take specific advice.
Before signing
Roll-over relief depends on the exact parties, share rights, asset tax classification, values, residence, VAT status, debt assumed, consideration received and the order of steps. Obtain transaction-specific tax and legal advice before agreements or resolutions are signed — a later correction may not restore the relief.