The tax implications of a private equity buy-out : a case study of the Brait-Shoprite buy-out

This treatise examines the history of private equity as a context in which to understand its role in the economy and specifically, the background for the high profile leveraged buy-outs that have been entered into in the past year. The treatise then focuses specifically on the Brait-Shoprite buy-out, examining its structure and the tax implications. The treatise then reviews the reaction of the South African Revenue Authority (“SARS”) to the buy-out and evaluates whether it was the best approach that could have been taken under the circumstances. As a result of the research, the following conclusions have been reached: Private equity transactions Private equity transactions have a role to play in the business world despite the apprehensions of tax authorities. The perception that these transactions are tax driven as part of an avoidance scheme is not justified. Structure of the Shoprite buy-out transaction: The Shoprite buy-out transaction was structured to obtain deduction for interest. The transaction was also structured to utilise the relief provisions of Part II of Chapter II (Special Provisions Relating to Companies) of the Income Tax Act no.58 of 1962, as amended (“the Act”). The relief was for capital gains tax (“CGT”) on disposal of the Shoprite assets. Finally, the transaction was designed to allow the existing shareholders to exit their investments free of Secondary Tax on Companies (“STC”). The reaction of SARS to the Shoprite buy-out transaction Whereas SARS may have been justified in questioning the structure and its impact on fiscal revenue, the response in the form of withdrawing STC relief from amalgamation transactions in section 44 was not in the best interest of a stable tax system and the majority of tax payers who are not misusing or abusing loopholes in the income tax legislation. It may have been possible for SARS to attack the structure based on the General Anti-Avoidance Rule (GAAR) in part IIA of the Chapter III of the Ac