What problem section 43 solves
Some companies historically issued their equity as linked units — a share stapled to a debenture (a loan instrument), sold and traded as one unit. Property funds were the classic users: the debenture part let the fund pay “interest” to investors. When the REIT regime arrived, these funds needed to convert linked units into ordinary shares.
Here is the difficulty: for tax purposes, cancelling your linked unit and issuing you an ordinary share in its place is a disposal of the unit — a taxable event — even though you own exactly the same slice of exactly the same company before and after. Without relief, a paper conversion would have produced real CGT bills for thousands of investors. Section 43 removes that result.
The definition — same company, different instrument
“‘substitutive share-for-share transaction’ means a transaction between a person and a company in terms of which that person disposes of an equity share in the form of a linked unit in that company and acquires an equity share other than a linked unit in that company.”
Read the definition slowly and its narrowness stands out. There is one company in the picture (“in that company … in that company”). The thing you give up is an equity share in the form of a linked unit; the thing you get is an equity share other than a linked unit. That is the entire field of play: an internal conversion of the form of your equity.
Note — this is why the everyday phrase “share-for-share deal” is misleading. A transaction where you swap your shares in Company A for new shares in Company B is not a section 43 transaction — a share is simply an “asset”, so that swap runs through section 42 (asset-for-share) if the requirements are met, or through section 44 if the companies are merging. Section 43 never leaves the building.
Step 1 of 4 · Before
How the roll-over works
Where the definition is met, the roll-over generally prevents an immediate gain or loss. You are deemed to dispose of the old unit for exactly what it cost you, and the new share steps into the old unit’s shoes:
“… where a person disposes of an equity share in a company and acquires another equity share in that company in terms of a substitutive share-for-share transaction, that person must be deemed to have— (a) disposed of that equity share so disposed of for an amount equal to the expenditure incurred by that person in respect of that equity share so disposed of … (b) acquired that other equity share so acquired on the latest date on which that person acquired any share comprising the equity share so disposed of for a cost equal to the expenditure incurred by that person as contemplated in paragraph (a) …”
Three things carry over: your cost (base cost for a capital holding, tax value for trading stock), your acquisition date, and your capital-or-revenue character — a unit held as a capital asset becomes a share held as a capital asset. On the company’s side, s 43(4A) deems the issue price of the old linked unit to be contributed tax capital of the class of the new share, so the company’s capacity to make capital repayments outside the dividends-tax net is preserved rather than reset.
Note — for units bought before the CGT valuation date (1 October 2001), s 43(1A) contains its own mechanism: the unit is treated as sold and immediately reacquired at market value just before the swap, locking in the pre-swap history so the ordinary base-cost rules can run afterwards.
Part-cash deals: the boot rule
If the company gives you anything other than the new equity share — cash or other non-share consideration such as an asset or a debt claim (tax practitioners call this “boot”) — the relief splits the transaction in two. The share-for-share part stays within the roll-over; the part attributable to the other consideration is a normal, taxable disposal:
“Where a person disposes of an equity share in terms of a substitutive share-for-share transaction and becomes entitled to consideration other than another equity share … (i) subsection (2) must not apply to the part of the equity share so disposed of that relates to that consideration …”
The base cost is split pro rata between the two parts by market value. A dividend declared as part of the arrangement is dealt with separately (the s 43(4)(a)(ii) wording excludes a “dividend, foreign dividend” from the boot calculation) — but dividend-heavy exits have their own anti-avoidance problem: see Dividend Stripping & the 18-Month Web.
Where you fall foul
Frequently asked questions
It is a swap of an equity share in the form of a linked unit for an ordinary equity share in the same company, with no immediate tax. Your cost, acquisition date and capital/revenue character roll into the new share. It was the tool that carried South Africa’s property funds through their linked-unit-to-REIT-share conversions.
No. A swap of shares in one company for shares in another company is an asset-for-share transaction under section 42 (shares are assets), or part of an amalgamation under section 44 where the companies merge. Section 43 only ever operates inside a single company.
Transfers of securities under the corporate rules are exempt from STT under s 8(1)(a) of the Securities Transfer Tax Act, subject to the public officer’s sworn declaration — and an issue of new shares is in any event not a “transfer”. See VAT & Securities Transfer Tax When Restructuring.
The cash (or any other non-share consideration) is carved out: that part of your old share is treated as sold in the ordinary way, with a pro-rata slice of your base cost set against it. Only the share-for-share part enjoys the roll-over.
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.