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CGT implications of AB InBev share offers

In light of AB InBev’s take-over of SABMiller, SABMiller shareholders have to consider the capital gains tax (CGT) implications of the options they have been given. It would be helpful if you could explain the CGT implications in each of the following scenarios:

• Scenario one: accept the cash offer.

• Scenario two: partial share swop. This entails an “asset-for-share” swop, where a percentage of the SABMiller holdings (the proposed percentage is 41.6 percent) are swopped for shares in AB InBev, a cash adjustment is made for the shares swopped, and shareholders are paid out the balance in cash.

• Scenario three: 100-percent share swop, and shareholders are paid out for the associated cash adjustment.

In scenarios two and three, are shareholders entitled to roll-over relief on the shares swopped? What happens to the cash received?

In scenario two, there is an associated base cost, because some shares were effectively sold (that is, cash was received for the shares not swopped, and the cash adjustment was received for the shares swopped). Will all the cash received be subject to CGT using the base cost for the shares not swopped?

In scenario three, there is no associated base cost, because all the shares were swopped (and not sold for cash). But how will the cash received for the adjustment be treated: as a capital gain or as income?

Anthony Smith

Trevor O’Callaghan, a portfolio manager at Old Mutual Wealth Private Client Securities, responds: Shareholders who elect to take the cash offer, or who receive it by default, will receive the rand equivalent of 45 British pounds per share on or around October 11, and will realise a capital gain on the proceeds. This is the obvious choice for investors for whom the tax consequences are not an issue and who do not want to reinvest the proceeds in AB InBev.

The partial share offer involves SABMiller shareholders receiving about 90 percent of their SABMiller shareholding in the form of new, unlisted AB InBev shares (to which you will have restricted access for five years) and the remaining 10 percent will be paid out in cash. The attraction of this offer is that it is worth more in rand terms, at least on current valuations, because the locked-up AB InBev shares are effectively being offered at a discount to their current worth.

On September 23, the cash offer was worth R802 and the partial share offer (based on AB InBev’s share price on that day) was R944.

• Scenarios two and three. The potentially favourable CGT impact of accepting the partial offer should not be taken at face value. Different investors not only have different investment time horizons, but also different appetites for risk and tax situations. Trusts, for example, are taxed differently to individuals or companies. Also remember that CGT must eventually be paid on a realisable gain. Although it may be possible for certain investors to avoid paying CGT now by accepting the partial offer, they are only deferring a tax that must eventually be paid.

It is not possible here to delve into the details of every possible entity’s potential CGT liability. Investors who believe they could benefit from a tax perspective in the short term should consult their tax specialists in this regard

• Scenario two. Yes, this is correct.

• Scenario three. There will always be a base cost. The implied roll-over cost will be equal to the implied base cost. Although I am not providing tax advice, a roll-over will most likely result in CGT being deferred.

Examples of the CGT implications using the three scenarios


Number of shares: 1 000

Cost price: R200

Rand base cost: R200 000

Rand-pound exchange rate: 18.89

Scenario 1: Shareholder takes the cash offer

Sale price of shares: 45 British pounds

Rand sale price: R850

Implied value on sale: R850 000

Gain: R650 000

Scenario 2: Shareholder swops 41.6 percent of the shares

Sale price of shares not swopped: 45 British pounds

Rand sale price: R850

Cash from sale: R496 400

Number of AB InBev shares: 200

Sale price of shares swopped: 90 British pounds

Cash from shares swopped: R35 360

Value of the shares swopped: R339 456

Implied value: R871 216

Gain: R671 216

Scenario 3: Shareholder swops all the shares

Number of AB InBev shares: 480

Sale price of shares swopped: 90 British pounds

Cash from shares swopped: R85 000

Value of the shares swopped: R816 000

Implied value: R901 000

Gain: R701 00

Keith Engel, the chief executive at the South African Institute for Tax Practitioners, responds: If shareholders accept the cash offer for their SABMiller shares, it will probably be regarded as a disposal for CGT purposes (given that most of the shares are held as passive holdings and not by active traders).

The issue in scenarios two and three is that the shares in AB InBev are in a foreign company, and the share swop will be taxed in the same way as the cash received. This CGT treatment applies even if the AB InBev shares received in the swop are listed on the JSE.

The only way the CGT can be avoided is if the shares received are issued by some form of dedicated South African company that are economically equivalent to the AB InBev shares. Only in these circumstances will your share swop be entitled to a roll-over.

If you hold shares as a discretionary investment, you will be liable for CGT on 40 percent of that portion of the gain that exceeds the exemption of up to R40 000 a year (assuming you have not used the exemption for other capital gains in the same tax year).

A different set of rules will generally apply if your SABMiller shares were held in certain investments.

If the shares surrendered were held within a unit trust fund or collective investment scheme, the transaction within the fund will be exempt from CGT. You will be liable for CGT only when you sell your unit trust.

If the shares were held within a retirement fund, the swop would also be exempt from CGT, with tax possibly arising only once the fund makes a payout to you at retirement, or when you start receiving a pension.

Some wealth divisions and boutique asset managers offered to buy shareholders’ SABMiller shares, before the shares were delisted, in return for units in their collective investment schemes. In this scenario, the swop of SABMiller shares for cash and/or AB InBev shares would occur within the fund, and you might expect to be taxed only when you sell your units.

However, the South African Revenue Service (SARS) has warned these unit trust funds that, if they acquired the shares for the purpose of disposing of them within a relatively short period after the takeover, the proceeds may be regarded as income, rather than capital, which will trigger tax, because unit trust or collective investment scheme relief does not apply to ordinary revenue. SARS says it has not yet made a decision on this question, but it is likely that it will regard such a disposal as of a revenue nature. If the profits are distributed within 12 months, the unit-holders will have to pay tax on the profits, SARS says.

SARS says it will also consider whether the transactions amount to tax avoidance under the Income Tax Act, because the postponement of the tax is a benefit and the transactions’ sole or main purpose was to obtain a tax benefit.

The period within which shares could be swopped into these unit trust funds was so short that few taxpayers are likely to benefit from this swop.

Note: Letters and answers are edited for clarity and length.

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