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. A donation, or a disposal for a consideration that cannot be measured in money, can trigger the market-value rule, and a transaction with a connected person (such as your own company) must also pass the arm’s-length test in paragraph 38 — so a below-value price does not shrink the tax. Depending on the asset and its tax history, the disposal can produce income tax, recoupments or CGT. Left alone, that would usually crystallise the 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).
Receiving shares and passing the shareholding test is not the whole test. As a short checklist, check:
- the parties’ eligibility and residence;
- the asset’s value and its tax character in both hands (capital asset or trading stock, for you and for the company);
- that the company issues new shares that meet the Act’s definition of an equity share;
- the qualifying-interest or full-time-service requirement that applies to you — the full-time-service route does not waive the other requirements;
- any cash, debt taken over or other consideration that is not shares; and
- the exclusions and the rules about what happens afterwards (the 18-month rules below).
An ordinary family trust can be the transferor under section 42, but it cannot receive the asset in place of the qualifying company.
““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 (checked 29 September 2026) — the Taxation Laws Amendment Act 5 of 2026 (promulgated 1 April 2026) changes the collective-investment-scheme parts of s 42, and its changes do not all start in the same way. Section 27 deletes paragraphs (b) and (e) of the “qualifying interest” definition (the collective-investment-scheme and hedge-fund-portfolio limbs) and rewrites the related provisos, with effect from 1 January 2027 and applying to transactions entered into on or after that date. Section 26 narrows the s 41 definitions of “company” and “equity share” so that CIS portfolios count for s 44 only and no longer for s 42 — also from 1 January 2027, but applying to years of assessment commencing on or after that date, which is a different test. Separately, section 27 contains limited listed-company threshold wording with earlier effect (years of assessment commencing on or after 1 January 2026). Until those dates the current wording still applies. For the family structure — the 10%-shares/10%-voting-rights test in paragraph (c), which is not itself confined to unlisted companies but is the limb that matters here — nothing changes; for a listed-share transaction, check the Act’s commencement provisions for the exact wording that applies on your implementation date. Section 49 of the same Act adds a separate STT exemption (s 8(1)(y)) for a transfer to a collective investment scheme portfolio in return for a participatory interest, also from 1 January 2027 — it does not touch the existing exemptions.
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
The example assumes the R1 million bond over the property stays Thabo’s — he settles it himself before the transfer, so Newco takes the property unencumbered. If Newco takes the bond over instead, the rules in the next section decide the tax.
If Newco takes over the bond: s 42(4) and s 42(8)
Section 42 is relief for an asset exchanged for shares. If the transferor gets anything else as well — cash, a loan account, or the company taking over a debt — s 42(4) splits the transfer. To the extent that shares are issued, it remains a section 42 transfer; to the extent of the other consideration, it is treated as a disposal of part of the asset outside section 42, taxed now. The base cost allocated to that part is in the same ratio as the market value of the non-share consideration bears to the market value of the total consideration.
A bond that the company takes over is the main exception: s 42(4) excludes “any debt assumed by that company as contemplated in subsection (8)”. Section 42(8) covers a debt that the asset secures and that the transferor incurred either more than 18 months before the transfer, or within those 18 months but at the same time as he acquired the asset — or to the extent that it refinances a debt that met one of those two tests — where the company assumes that debt or an equivalent amount of debt secured by the asset. (It separately covers the ordinary-course debts of a business transferred as a going concern.) Such a debt is not taxed as consideration when the company takes it over. Instead, when the transferor later disposes of any of the shares from the transaction, the face value of the debt that relates to those shares is treated, where he holds them as capital assets, as a return of capital on them, accruing immediately before that disposal (or, where he holds them as trading stock, as income) — even if he remains liable as surety for the bond.
“(8) Where a person disposes of— (a) any asset which secures any debt to a company in terms of an asset-for-share transaction and that debt was incurred by that person— (i) more than 18 months before that disposal; or (ii) within a period of 18 months before that disposal— (aa) and that debt was incurred at the same time as that asset was acquired by that person; or (bb) to the extent that debt constitutes the refinancing of any debt in respect of that asset incurred as contemplated in subparagraph (i) or item (aa) of subparagraph (ii), and that company assumes that debt or an equivalent amount of debt that is secured by that asset; … that person must, upon the disposal of any equity share acquired in terms of that asset-for-share transaction and notwithstanding the fact that that person may be liable as surety for the payment of the debt referred to in subparagraph (a) or (b), treat so much of the face value of that debt as relates to that equity share— (A) where that equity share is held as a capital asset, as a return of capital in respect of that equity share that accrues to that person immediately before the disposal by that person of that equity share; …”
Note — Para (A) was last substituted by s 25(1)(d) of Act 20 of 2021 for disposals of shares on or after 1 January 2022; the consolidation shows no later amendment to s 42(8). Para (B), not quoted, applies where the shares are held as trading stock and includes the amount in income instead.
On Thabo’s facts. If the R1 million bond was raised when he bought the property years ago (or in any event more than 18 months before the transfer) and Newco takes it over, s 42(8) applies: nothing is taxed when Newco assumes the bond, but the R1 million is treated as a return of capital on his Newco shares immediately before he transfers them to the trust. Model what that does to his base cost in the shares (the Eighth Schedule’s return-of-capital rules in para 76B) before agreeing to it. If part of the debt was instead borrowed against the property within the 18 months for some other purpose, and is not a refinancing of the original bond, that part is not a s 42(8) debt: it is consideration other than shares, and s 42(4) taxes that slice of the transfer now. The bank’s consent to Newco taking over the bond is a conveyancing requirement; it does not decide the tax.
Three exclusions in s 42(8A). Section 42 does not apply at all where the transferor and the company agree in writing that it does not apply; where the disposal would not be taken into account in determining the transferor’s taxable income or assessed loss (or a controlled foreign company’s net income imputed to a resident under s 9D); or where the asset is a debt owed by, or a share in, the company itself.
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 (usually on loan account, which brings in section 7C) or donates them (attracting donations tax). Either way it is a disposal by the founder: a donation is treated as made at market value, and a sale to a connected trust must pass the arm’s-length test in Eighth Schedule para 38, failing which market value is substituted. The earlier section 42 transfer does not make this step tax-free, so the gain deferred by section 42 surfaces in the founder’s own hands — on the Nkosi numbers a R4 million gain, whether or not any cash changes hands.
The transaction taxes on that second step depend on what Newco holds. If Newco is a residential property company (its main asset is a residential rental), the trust’s acquisition of the shares is an acquisition of “property” for transfer duty on the property’s fair value (about R437 356 on R6 million), and securities transfer tax is then not payable, because s 8(1)(n) of the STT Act exempts an unlisted security whose acquisition is subject to transfer duty. Where the company is not a residential property company, STT of 0.25% applies unless another exemption fits.
“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 outside it. But check s 8(1)(n) before budgeting the 0,25%: where the acquisition of unlisted shares is subject to transfer duty (a residential property company), STT is exempt. Do not budget for both taxes on the same share acquisition.
The 18-month rules
Three separate anti-avoidance subsections watch the 18 months after a section 42 transaction: s 42(5) (an early sale of the shares), s 42(6) (losing the qualifying interest or stopping the full-time service) and s 42(7) (the company selling the asset early). They are not one holding-period rule, and none of them is an outright ban on selling for 18 months. It is important to read each precisely, because the headline danger is often overstated. (A further 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 (other than by way of an intra-group transaction contemplated in section 45, an unbundling transaction contemplated in section 46 or a liquidation distribution contemplated in section 47, an involuntary disposal as contemplated in paragraph 65 of the Eighth Schedule or the death of that person) 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. That 18-month trigger has its own carve-out: a disposal by way of a s 45 intra-group transaction, a s 46 unbundling, a s 47 liquidation distribution, an involuntary disposal under Eighth Schedule para 65, or the shareholder’s death, does not count as the “disposal” that starts this rule. The income inclusion (in the Act’s concluding words, not quoted above) 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. Where the test is not met, an early share sale can still produce ordinary CGT — it simply does not trigger this income-character rule.
Section 42(6): losing the qualifying interest or stopping full-time service
A further 18-month rule can apply even without a sale. If, within 18 months of the transaction, the transferor stops holding the qualifying interest that s 42(6) specifies (the 10% shareholding-and-voting limb or the group-company limb), or stops the full-time service on which the transaction qualified, the roll-over shares still held immediately afterwards are treated as sold and immediately reacquired. The deemed proceeds are the shares’ market value on the date of the original asset-for-share transaction. A dilution (for example, new shares issued to someone else) or a change in group membership can therefore matter as much as a disposal.
The subsection has specific exceptions — where the interest is lost through a s 45, s 46 or s 47 transaction, through an involuntary disposal, or on the person’s death — so check the applicable exception before acting. And keep the rule in proportion: if you sell all the roll-over shares and hold none immediately afterwards, s 42(6) has nothing left to deem sold; the actual sale still needs its own tax calculation, including s 42(5) where that applies (Income Tax Act 58 of 1962, s 42(6)).
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.
Note what is ring-fenced: not automatically the company’s whole gain, but the historic amount the subsection specifies — so much of the gain as would have arisen had the asset been sold at market value at the start of the 18 months. That part cannot be set off against the company’s capital or assessed losses. Any growth after that date is taxed in the ordinary way.
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 the usual test is at least 10% of the equity shares and voting rights; the definition also covers listed shares and group companies, and a natural person who will work full-time in the company’s service business qualifies without it), no immediate CGT arises — the gain is deferred, not forgiven, because the company takes over your base cost and you take the shares at that same cost.
No — it defers the tax, it does not forgive it. The company inherits your tax cost in the asset, so the built-in gain is taxed when the company later sells the asset. Separately, you take the new shares at that same low cost, so a later sale of the shares is its own taxable disposal. Section 42 also does not, on its own, deal with transfer duty or VAT, and it does not make a later move of the shares into a trust tax-free.
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. Two other 18-month rules need their own checks. Under s 42(6), if within 18 months you stop holding the 10% or group-company qualifying interest (or stop the full-time service you qualified on), the roll-over shares you still hold are treated as sold and reacquired at their market value on the original transaction date — even without a sale, for example through a dilution. Under s 42(7), if the company on-sells the property within 18 months, the part of its gain that had already built up when it acquired the property is ring-fenced and cannot be set off against its losses. Letting the 18 months run before moving the shares is still the conservative practice — but it is not an exemption for the second step: selling or donating the shares to the trust is a disposal at market value with its own CGT in your hands.
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.