Proposed changes to reduce the ambit of a de-grouping charge affecting past intra-group transactions

By: Bruce Russel
Director: Tax

Section 45 of the Income Tax Act (ITA) offers roll-over relief for intra-group transactions, deferring any income tax consequences from asset transfers between group companies. However, subsection 45(4) of the ITA includes provisions for a claw-back of deferred income tax under specific circumstances, known as a de-grouping charge.

The de-grouping charge may occur if:

1. Within six years of the intra-group transaction, the transferee company ceases to be part of the same group as the transferor company.
2. Within six years of the transaction, the transferee company ceases to be part of any group in relation to a controlling group company of the transferor company.

Notably, a group of companies may encompass those directly or indirectly held by a controlling group company. Consequently, the scope of the de-grouping charge is broad and could trigger income tax consequences if changes in shareholding takes place that affects the shareholding structure of a group of companies that existed at the time of the intra-group transaction. For instance, a de-grouping charge may arise from a transfer of shares in an indirect holding company, even if two companies party to the original intra-group transaction remain part of an immediate group of companies.

In Annexure C to the 2024 Budget Review, the National Treasury proposes amendments to limit the scope of the de-grouping charge. This welcomed amendment aims to narrow the charge’s applicability in cases of shareholding changes. Specifically, the proposal suggests that the de-grouping charge should not apply if the companies involved in the intra-group transaction remain part of another group of companies.