Section 45 Intra-Group Transactions Explained

What counts as an intra-group transaction

Three features do the work. It is company to company — a trust or individual can never be a party to a s 45 transfer. The companies must be in the same group at the end of the day of the transaction. And the asset must keep its character: capital stays capital, trading stock stays trading stock (contrast s 42, which permits certain switches). A para (b) limb extends the section to certain foreign-share transfers inside a group, but the domestic para (a) transaction is the everyday tool.

Note — unlike s 42, the transferee does not issue shares for the asset. In fact s 45(6)(c) excludes a disposal made in exchange for equity shares issued by the transferee — that transaction belongs to s 42. A s 45 transfer is typically done on loan account (the transferee owes the price) or as a distribution-free transfer, which is exactly why the funding rules below exist.

What “group of companies” means here

The Act’s basic s 1 definition requires a controlling company holding, directly or indirectly, at least 70% of the equity shares in each controlled company. But Part III narrows it. Section 41(1) strips out of the group, among others: non-profit companies, tax-exempt entities, and — most importantly for planning —

The same proviso also disregards shares held as trading stock and shares locked into non-market-value buy-sell arrangements when testing the 70%. The practical point: a “group” on the organogram is not automatically a “group” for s 45. Foreign-managed companies, exempt entities and encumbered shareholdings can silently break the chain — test the definition before every transfer, not once a year.

How the roll-over works

Inside the group, the familiar Part III machine runs: the transferor is deemed to dispose of a capital asset at base cost, and the two companies are treated as one and the same person for the asset’s history — acquisition date, expenditure, valuations (s 45(2)). Trading stock rolls at tax value. Allowance assets transfer without recoupment, with the transferee continuing the allowance history (s 45(3)). Economically, the group has simply moved the asset from one pocket to another — and the Act taxes it accordingly: not at all, for now.

The deferral lasts only while the family stays together. Three provisions make sure of it.

The six-year degrouping charge — s 45(4)

The central bargain of s 45: the gain is deferred because the asset stays in the group. If the transferee leaves the group — is sold, or the chain of 70% holdings breaks — within six years of the transfer, the deferred amounts can spring back to life in the transferee:

In plain terms: sell the subsidiary within six years of stuffing assets into it, and the subsidiary is generally taxed as if it had realised the deferred gain — measured as the lesser of the gain at the time of the intra-group transfer(s) and the gain at exit. The charge is not mechanical in every departure: it tests cessation in relation to the transferor (or a controlling group company of the transferor), it applies only where the transferee still holds the asset, and s 45(4A) excludes certain departures caused by past statutory changes — the exact relationships need checking on every exit. There is partial mercy in the mechanics (the base cost is stepped up by the amount taxed, so there is no double counting), and equivalent rules claw back deferred allowance recoupments and trading-stock profits. The charge lands on the transferee — the company being sold — which is why a six-year s 45 history and an appropriate indemnity are standard items in any buyer’s due diligence on a group company.

Note — successive roll-overs do not restart the analysis cleanly: the charge looks at any intra-group disposal in the preceding six years, and SARS’s Binding Private Ruling 388 deals with exactly how the rule applies after a chain of earlier s 45 transfers. Where a group is reorganised more than once, map every asset’s s 45 history before any company leaves.

The two-year value-extraction rule — s 45(4B)

A group cannot dodge the degrouping charge by technically staying a group while shipping the sale proceeds out. Section 45(4B) deems the companies to have degrouped where the transfer forms part of a transaction, operation or scheme in which the consideration (or more than 10% of anything derived from it) is passed out of the group within two years — for no consideration, at a non-arm’s-length price, or as a distribution. It is a fact-sensitive anti-avoidance rule aimed at value-extraction schemes, not a tax on every payment made on an intra-group loan — but any distribution or soft transfer of the consideration within the two years must be checked against it. Move the asset down, dividend the loan claim away, and the Act can treat the family as broken even though the shareholding never changed.

Funding the transfer: the s 45(3A) nil-base-cost rule

Most s 45 transfers are paid for with debt (a loan account) or preference shares rather than cash. Section 45(3A) attacks the paper that funds the deal: where the consideration is funded directly or indirectly by the issue of debt or non-equity shares within the group, the group holder of that debt or share is deemed to have acquired it for expenditure of nil:

Repayments of the loan (or capital on the pref share) inside the group are disregarded rather than taxed (s 45(3A)(c)–(d)) — but sell or distribute that loan claim outside the protected environment and the holder is sitting on an asset with a base cost of nil: the full face value becomes gain. Section 45(3B) restores expenditure once one of the sanctioned exit events happens (degrouping, the sixth anniversary, or the transferee disposing of the asset outside Part III). This is the technical machinery behind the standard advice that s 45 loan accounts must be handled with gloves — and the deduction side of the funding has its own limits under s 23N (interest on reorganisation debt) and, for preference-share funding, the recharacterisation risks of ss 8E–8EA.

The 18-month rule and the exclusions

The 18-month rule (s 45(5)). If the transferee disposes of the asset within 18 months of acquiring it, the historic amount (up to the asset’s value at the start of the period) is calculated separately and restricted from set-off: a capital gain’s resulting taxable capital gain cannot be set off against the transferee’s assessed losses, a matching rule quarantines early capital losses (usable only against gains on other assets from the same transferor), and trading-stock and allowance amounts are deemed to belong to a separate trade with the same restriction. Involuntary disposals and regularly-traded stock are excepted, and the rule stands down where the degrouping charge has already applied to the asset.

The exclusions (s 45(6)). No s 45 relief where the transferee is tax-exempt; where the asset is exchanged for equity shares issued by the transferee (that is s 42’s job); where the asset is a share in the transferee itself; where the transfer is really a s 47 liquidation distribution; or — the everyday one — where the parties simply agree in writing that s 45 must not apply (s 45(6)(g)). Electing out is common where the transferor wants to use a capital loss or the group prefers a market-value base cost — but remember the STT and transfer-duty exemptions ride on the section applying, so an opt-out revives those costs.

Worked example · the Nkosi family

Frequently asked questions

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.