What an unbundling does
Every other roll-over moves assets between companies. An unbundling moves a company out from under another: shareholders who used to own the subsidiary indirectly (through the holding company) end up owning it directly, side by side with the holding company. Nothing is sold and no cash moves — the shareholding is handed up the chain.
Groups unbundle to separate businesses with different futures, to prepare one company for listing or sale, to remove a redundant tier from the structure, or to comply with a Competition Tribunal order. Without s 46 the distribution would be a double tax event: a disposal at market value by the company (CGT) and a dividend in specie to the shareholders (dividends tax). Where the section applies, it switches off both — but only for the portion of the distribution that actually meets the definition.
Step 1 of 4 · Before
The three gateways — and the size thresholds
The definition asks two separate questions, and both must be answered yes. First: does the distribution pass through one of three gateways? Second: is the shareholding distributed big enough?
“‘unbundling transaction’ means any transaction— (a)(i) in terms of which the equity shares in a company (hereinafter referred to as the ‘unbundled company’), which is a resident that are held by a company (hereinafter referred to as the ‘unbundling company’), which is a resident, are all distributed by that unbundling company to any shareholder of that unbundling company in accordance with the effective interest of the shareholders in the shares of that unbundling company, and if— (aa) all of the equity shares of the unbundled company are listed shares or will become listed shares within 12 months after that distribution; (bb) that shareholder to which that distribution is made by that unbundling company forms part of the same group of companies as that unbundling company; or (cc) that distribution is made pursuant to an order in terms of the Competition Act, 1998 (Act No. 89 of 1998), made by the Competition Tribunal or the Competition Appeal Court; and (ii) if the equity shares distributed as contemplated in subparagraph (i) constitute— … (bb) where that unbundled company is an unlisted company immediately before that distribution, more than 50 per cent of the equity shares of that unbundled company;”
In plain language, the gateways are: (aa) listed shares — the unbundled company’s shares are listed, or will be within 12 months (this is how JSE unbundlings reach every kind of shareholder); (bb) group shareholders — the recipient shareholder is part of the same statutory group of companies as the unbundling company; or (cc) a Competition Act order. On top of the gateway sits the size threshold in limb (ii): for an unlisted unbundled company, the unbundling company must distribute more than 50% of its equity shares; for a listed one, more than 25% (or at least 35% where another shareholder matches the unbundling company’s holding). The unbundling company must also distribute all the shares it holds, pro rata to shareholders’ effective interests. A para (b) limb extends the section to certain foreign-subsidiary unbundlings inside a group.
The unlisted trap: shareholders must be group companies
Here is the point this page exists to make, because it is missed constantly in private-company planning. For an unlisted subsidiary that is not heading for a listing and with no Competition order in play, the only gateway left is (bb) — and (bb) is tested shareholder by shareholder: the recipient must form part of the same group of companies as the unbundling company. A group of companies consists of companies linked by 70% shareholding. A family trust cannot be part of a group of companies. Neither can an individual.
So an unlisted private company cannot use the ordinary s 46 route to hand its subsidiary’s shares up to a trust or a person — no matter that it holds 100% of the subsidiary and clears the 50% threshold. The threshold was never the problem; the gateway is. SARS’s draft general ruling on this exact question (non-binding, but tracking the statutory wording) confirms the mechanics: where some shareholders qualify and others do not, the transaction splits — the portion distributed to group-company shareholders is an unbundling transaction, and the portion distributed to non-qualifying shareholders (trusts, individuals, non-group companies) falls outside s 46 and is taxed under ordinary principles: a disposal at market value for the company, with potential dividends tax on that leg.
The three-way tax neutrality
Where — and to the extent that — the definition is met, a qualifying unbundling is neutralised at every level where tax could bite:
“Subject to subsection (7), where an unbundling company distributes shares in terms of an unbundling transaction, that unbundling company must disregard that distribution for purposes of determining its taxable income or assessed loss…”
“Subject to subsection (7), where shares are distributed by an unbundling company to a shareholder in terms of an unbundling transaction, the distribution by that unbundling company of the shares must be disregarded in determining any liability for dividends tax.”
So: no immediate income tax or CGT in the unbundling company (s 46(2)), no dividends tax on the in specie distribution (s 46(5)), and no return-of-capital adjustment against the shareholder’s base cost (s 46(5A) switches off para 76B of the Eighth Schedule). Shareholders are not taxed on receiving the shares; they carry on with a reorganised base cost. Contributed tax capital is re-apportioned between the two companies by market value (s 46(3A)). Remember throughout: this treatment attaches to the qualifying portion of the distribution only, and every other requirement (including the anti-avoidance rules below) must still be met.
Splitting the base cost
Shareholders do not get a base-cost uplift. The cost of the original shares is split between the unbundling shares and the new unbundled shares in proportion to their market values just after the distribution (s 46(3)): the new shares take their slice, the old shares’ cost is reduced by the same amount, and the new shares are deemed acquired on the same date as the old ones — so pre-existing holding periods (including the three-year s 9C clock, subject to its own rule) are not reset, and the character (capital or trading stock) carries over.
Note — the market values are measured at the end of the day after the distribution, which for listed unbundlings means the split follows the market’s first pricing of the two companies apart. Keep the calculation with the share register: every future disposal of either shareholding depends on it.
The disqualified-person rule — s 46(7)
Even inside the gateways, the relief is not available for every recipient. For the main s 46(1)(a) route, the section does not apply to shares distributed to a disqualified person holding at least 5% of the unbundling company:
“…this section does not apply in respect of any equity share that is distributed by an unbundling company to any shareholder that— (i) is a disqualified person; and (ii) holds at least 5 per cent of the equity shares in the unbundling company immediately before that unbundling transaction.”
“Disqualified person” covers non-residents, government, public benefit organisations, approved recreational clubs, mining rehabilitation entities, retirement and benefit funds, and other tax-exempt persons (s 46(7)(b)). For those slices of the register the distribution is taxable in the unbundling company’s hands — and s 46(3)(a)(v)’s proviso then spreads that tax cost across shareholders as deemed expenditure. This rule matters mostly on the listed route, where the register contains every kind of holder. Below the 5% threshold this particular exclusion does not apply — but every other s 46 requirement, starting with the gateways, must still be met.
Note — a REIT (or its controlled company) cannot be the unbundling company at all (s 46(6A)), and where an unlisted unbundling would put a controlled subsidiary directly into the hands of a controlling company shareholder, the parties may in defined circumstances agree in writing that s 46 does not apply (s 46(8)).
The section 46A base-cost limitation
Section 46A exists to stop a specific two-step: a tax-exempt or non-taxable person sells shares in the unbundling company (no tax on the sale), and the buyer then receives unbundled shares whose base cost reflects the full purchase price — manufacturing stepped-up cost with no tax ever paid on the value. Where a connected person held shares in the unbundling company within the two years before the unbundling and their disposal escaped tax, the taxpayer’s expenditure for the unbundled shares is capped by reference to the connected person’s original cost and taxed amounts (s 46A(1)–(2)). If shares moved around shortly before an unbundling, check this section before relying on the face-value base cost.
Worked example · the Nkosi family
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.
Frequently asked questions
It is a distribution in which a resident company hands all the shares it holds in a resident subsidiary to its own shareholders, pro rata. Where the definition’s gateways and thresholds are met, the company has no immediate tax on the distribution, no dividends tax arises, and shareholders split their existing base cost between the two shareholdings. The result is a flatter structure — but the gateways decide who can receive the shares with relief.
No, but the route changes. If the unbundled company’s shares are listed (or will list within 12 months), distributions to shareholders generally pass the gateway regardless of who they are — subject to the size thresholds and the disqualified-person rule. If the shares are unlisted and staying unlisted, the ordinary route only covers distributions to shareholder companies in the same statutory group as the unbundling company (more than 50% of the subsidiary must be distributed). A Competition Tribunal order is the third, rarer gateway.
Only through the listed gateway (or a Competition Act order). Where a listed company unbundles a subsidiary, a trust shareholder receives its pro-rata shares like any other holder — a resident family trust is not a “disqualified person”. On the unlisted route the answer is no: the recipient must be a company in the same group of companies, which a trust can never be. Owning more than 50% of the subsidiary does not change this — that is a different requirement.
Not where it qualifies — s 46(5) expressly disregards a qualifying distribution for dividends tax, and s 46(5A) stops it being treated as a base-cost-reducing return of capital. The shareholder’s position is dealt with through the base-cost split in s 46(3). The portion of a distribution that falls outside s 46 (for example, to non-qualifying shareholders on the unlisted route) is a normal distribution, and its dividends-tax position must be analysed separately.
Two different rules to check. On any route, a disqualified person (which includes a non-resident) holding 5% or more of the unbundling company is carved out: shares distributed to it are a taxable distribution for the company, with the tax cost pushed into shareholders’ deemed expenditure. Below 5%, that particular exclusion does not apply — but every other requirement, including the gateway for that shareholder, must still be met on the unlisted route.