When the demutualisation of the two last mutual assurance companies in South Africa Old Mutual and Sanlam takes place, a lot of people will receive a "windfall" in the form of "free" shares in the newly listed companies.
If you hold a qualifying policy with either or both life assurers you could suddenly be the proud owner of shares, which could be converted to cash. What does this mean from a tax point of view? In most cases you will not be taxed on these shares. Finance Minister, Trevor Manuel, in his budget speech, said the government would take its cut in the form of a demutualisation tax before the shares are handed out.
Similarly, if you immediately sell the shares, you will generally not be taxed on the proceeds.
You may choose to hang onto the shares with a view to selling them later, or leaving them to your children. When the shares are sold, again, generally, you will not be subject to tax on the proceeds.
However, the South African Revenue Services (SARS) will take cognisance of your intentions on sale, and your activities leading up to sale. If you start trading in shares and mix your "windfall" shares with other shares it may become difficult to prove that your intention in relation to the shares results in them being capital in nature, although the fact that they are "windfall" shares would probably assist you in this regard.
There may be other circumstances that might make the receipt of the shares and the tax position on realisation less clear.
There are situations where, for example, people have been bought second-hand policies in the life assurance companies in the hope that, by buying such a policy, you become entitled to the "windfall" shares.
It is not clear whether, if you buy such a policy, you will qualify for these shares. Assuming you do, the question is whether you will have to pay tax on them. Alternatively, if after receipt of the shares they are sold immediately, does any tax arise?
A further situation that I believe is taking place, is that people who would like to secure a right to some of the shares, are paying policyholders to cede their rights in the shares to them. On receiving the shares, would such buyers be taxed?
The answers to these questions may depend on the circumstances of the purchase and sale of the shares.
If you are buying a second- hand policy to obtain the rights in the policy, and the receipt of the shares is incidental to that, then, if you can prove the true purpose for buying the policy, the shares will be treated as a fortuitous gain, and not taxed.
But if you acquired the policy to gain access to the shares and, particularly if you sell them shortly after receipt, then the SARS may argue that your intention was to make a profit. In this case the proceeds would be taxable.
Clearly, how you acquired the shares, your intention while you hold them and when you sell them, will determine the taxability of the proceeds on sale.