2017 Draft Taxation Laws Amendment Bill

A Focus on Share Buy-Backs

The latest Draft Taxation Laws Amendment Bill (“the Bill”) was published on 19 July 2017. The Bill intends to materially alter the tax consequences on certain transactions including the tax consequences relating share buy-backs.

Share buy-backs entail the repurchasing of shares by the company that issued them. A buy-back happens when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors. Up until 19 July 2017, if shares were bought back via a dividend the transaction would be subject to dividends tax if certain criteria were met.

Since the introduction of dividends tax in April 2012, share buy-backs have become a very popular mechanism for exiting an investment in a South African company. One of the reasons for this is that, from a tax perspective, a share buy-back could have advantages above other share disposals.

At this point in time dividends are exempt from income tax in terms of section 10(1)(k)(i) of the Income Tax Act, 1962 (the “Act”). Furthermore, dividends paid to South African resident companies are exempt from dividends tax in terms of section 64(F)(1)(a) of the Act. From the aforementioned, it’s clear on the advantages a share buy-back transaction had, especially where the disinvesting shareholder is a South African resident, where it provided a very tax-efficient and favourable arrangement for these shareholders.

The tax consequences of a company distribution in the hands of the holder of the shares can be classified either as dividends or a return of capital. Return of capital is a distribution from ‘contributed tax capital’ where a dividend is a distribution from other sources than ‘contributed tax capital’ like a distribution from retained income. Where the distribution is in the form of a dividend, it would be subject to Dividends Tax. Where the distribution is in the form of a return of capital, it would be subject to Capital Gains Tax (CGT). It is therefore very clear that when the transaction is planned and structured that you understand the tax thereon as the result will materially affect your transaction and the tax consequences thereon.

If a distribution is made from the retained income of a company (CPY A) to repurchase the shares, the distribution will be classified as a dividend and therefore subject to Dividends Tax. Therefore the shareholder (CPY B) will have the following tax consequences:

  • The dividend is included in the shareholder’s gross income according to paragraph (k) of the “gross income” definition set out in Section 1 of the Act.
  • However the dividend is exempt from the income according to Section 10(1)(k)(i) of the Act and would therefore have no income tax consequences.


The Bill was also released on the 19th of July 2017 which had the following statement contained therein with regards to share buy-back transactions: “Subsection (1) is deemed to have come into operation on 19 July 2017 and applies in respect of any disposal on or after that date”.

The Minister of Finance earlier in 2017 provided in his budget speech that tax payers are to expect Act amendments, the warning (as per page 136 of the budget speech) reads as follow:

  • “Addressing the circumvention of anti-avoidance rules
    Addressing the abuse of disguised sale of shares using share buybacks: In the 2016 Budget Review, tax avoidance schemes involving share buybacks were highlighted for review. Such schemes involve a company buying back shares from its current shareholders to avoid the tax consequences of share disposals. The seller receives payment in the form of a dividend that may be exempt from normal tax and dividends tax, instead of paying tax on the sale of shares. Following the announcement in 2016, no specific countermeasures were introduced. It is therefore proposed that specific countermeasures be introduced to curb the use of share buyback schemes.”

After the release of the Bill we now have an idea on the countermeasures mentioned by the Minister of Finance. With regards to the retrospective effect of the Bill the Pienaar Brothers (Pty) Ltd v Commissioner for the South African Revenue Service and Another (87760/2014) [2017] ZAGPPHC 231 (29 May 2017) case held that retrospective effects are not unconstitutional in situations where taxpayers have been warned against Act amendments. Tax payers now have a better idea on the proposed changes to share buy-back transactions as well as the action date and should therefore give great care in constructing these transactions.

Let us now consider the changes the Bill brought forth with regards to share buy-back transactions:

SARS has become increasingly concerned that share buy-backs are resulting in a loss of tax revenue. It’s presumably for this reason that, in 2015, a share buy-back and issue transaction was identified as a “reportable arrangement” for purposes of section 35 of the Tax Administration Act, 2011. There’s been considerable speculation in tax circles that SARS may seek to attack these transactions on the basis of the “substance over form” doctrine or using the general anti-avoidance rules set out in Section 80A – 80L of the Act. It is submitted that, in many circumstances, such an attack is unlikely to succeed, especially where there is a commercial rationale for concluding the share buy-back and the fact that a taxpayer is entitled to arrange his affairs to minimise his tax liability.1

In the budget speech for the 2016 tax year, the loss to the fiscus of the share issue-buyback combinations was recognised and the review dedicated the following paragraph to this issue:

  • “Avoidance schemes in respect of share disposals
    One of the schemes used to avoid the tax consequences of share disposals involves the company buying back the shares from the seller and issuing new shares to the buyer. The seller receives payment in the form of dividends, which may be exempt from normal tax and dividends tax, and the amount paid by the buyer may qualify as contributed tax capital. Such a transaction is, in substance, a share sale that should be subject to tax. The wide-spread use of these arrangements merits a review to determine if additional countermeasures are required.”

Nothing has been made publicly available till now as to how they would approach the said issue.

The Bill made the following amendment under the heading – “Dividends treated as proceeds on disposal of certain shares”:

(2) Where a company disposes of shares in another company and that company held a qualifying interest in that other company at any time during the period of 18 months prior to that disposal, the amount of any exempt dividend received by or that accrued to that company in respect of the shares disposed of must—

(a) to the extent that the exempt dividend is received by or accrues to that company—

(i) within a period of 18 months prior to; or

(ii) in respect, by reason or in consequence of that disposal; and

(b) if that company immediately before that disposal held the shares disposed of as a capital asset (as defined in section 41),

be taken into account, in the year of assessment in which those shares are disposed of or, where that dividend is received or accrues after that year of assessment, the year of assessment in which that dividend is received or accrues, as part of proceeds from the disposal of those shares.”


What does this mean?

If the provisions of subsection (2) are met, the dividend received will be included as part of proceeds and thus carry CGT consequences.

The above mentioned amendment has materially altered the tax consequences on our transaction. What once was a transaction with Dividend Tax consequences now became a transaction with CGT consequences. This transaction will now carry a tax bill that is considerably more than anticipated under the rules before the amendment.

Great care has to be given when transactions are structured to make sure that all relevant consequences are taken into account.

Make sure you have the right people in your corner to navigate you and your business through the ever changing and turbulent waters that is tax and law.



Gerhard Linde, master tax practitioner 26 July 2017



  1. Pretorius, K. (2017, May 16). Share Buy-Back Transactions – A Tax Perspective – South Africa. Retrieved July 27, 2017, from http://www.golegal.co.za/share-buy-back-transactions/
  2. SARS ruling on a share subscription transaction followed by a share. (n.d.). Retrieved July 27, 2017, from https://www.ensafrica.com/news/SARS-ruling-on-a-share-subscription-transaction-followed-by-a-share?Id=2174&STitle=tax ENSight #
  3. Publication of the 2017 Draft Taxation Laws Amendment Bill and the 2017 Draft Tax Administration Laws Amendment Bill for public comment. (2017, July 19). Retrieved July 19, 2017, from http://www.treasury.gov.za/comm_media/press/2017/2017071901%20-%20Media%20statement%20-%202017%20Draft%20Taxation%20Laws%20Amendment%20Bill%

Barnard Inc is an attorneys firm in Centurion, Pretoria.

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