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, and includes— (a) the sale, donation, expropriation, conversion, grant, cession, exchange or any other alienation or transfer of ownership of an asset; … (d) the vesting of an interest in an asset of a trust in a beneficiary; (e) the distribution of an asset by a company to a holder of shares; …
… 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— (a) 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 of that asset as at the date of that disposal; and (b) the person who acquired that asset must be treated as having acquired that asset at a cost equal to that 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).
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, in exchange for the issue of an equity share in that company and that person— (A) at the close of the day on which that asset is disposed of, holds a qualifying interest in that company; or (B) is a natural person who will be engaged on a full-time basis in the business of that company … of rendering a service; …
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 / section 11(a) or section 22 amount] …; and (ii) acquired the equity shares in that company on the date that such person acquired that [asset] …
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 in that company; (d) an equity share held by that person in a company which forms part of the same group of companies or that person; …
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.
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, to be known as the securities transfer tax, in respect of every transfer of any security issued by— (a) a close corporation or company incorporated, established or formed inside the Republic … at the rate of 0,25 per cent of the taxable amount of that security determined in terms of this Act. … s 8(1): The tax is not payable in respect of a transfer of a security— (a) if the security is transferred to a person— (i) in terms of an asset-for-share transaction referred to in section 42 of the Income Tax Act; …
Note — STT bites on 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.
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 contemplated in paragraph (a) 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 in terms of any transaction in respect of which the provisions of this Part apply, is attributable to allowance assets or trading stock or both, that person must, to the extent that any amount received by or accrued to that person in respect of the disposal of that share is less than or equal to the market value of that share at the beginning of such period of 18 months, include that amount in that person’s income.
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)).
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. A capital-held rental property is generally neither — so for the classic Nkosi structure, moving the Newco shares to the trust within 18 months would usually not trigger this inclusion.
Section 42(7): the company on-sells the asset within 18 months
(7) Where a company disposes of an asset, other than an asset contemplated in section 25BB(5), 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, may not be taken into account in determining any net capital gain or assessed capital loss of that company but is subject to paragraph 10 of the Eighth Schedule for purpose of determining an amount of taxable capital gain derived from that gain, which taxable capital gain may not be set off against any assessed loss or balance of assessed loss of that company; or
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.
Usually not, where the asset is capital-held property. The s 42(5) ordinary-income clawback 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 — which a capital-held rental generally is not. The genuine 18-month risk is s 42(7): if the company on-sells the property within 18 months, the gain for that period is ring-fenced. 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.