Capital gains surprise for Naspers shareholders

The listing of Prosus in Amsterdam results in an unexpected tax bill (but it’s not that bad).
Over the longer term, the net effect is negligible – the tax will have to be paid sometime; shareholders are just being forced to pay some of it now. Picture: Dwayne Senior, Bloomberg

It would’ve been nice if Naspers had structured the listing and partial unbundling of Prosus in a way that wouldn’t have left shareholders with the thorny issue of capital gains tax (CGT) to deal with.

But any alternative would probably have placed the CGT burden on Naspers itself – at higher tax rates. Plus each shareholder can take advantage of the R40 000 annual exclusion, which results in a lower tax bill in total for the shareholders collectively.

Naspers warned shareholders in different circulars that the changes to the share structure would land them with what the advisors called “a taxable event”.

Shareholders will receive one Naspers M-share for every Naspers N-share they hold by way of a capitalisation award. This is similar to receiving new shares in lieu of a cash dividend and no dividend withholding tax, income tax or CGT is involved.

CGT rears its head in the second step of the process. This is when each Naspers M-share is swapped for one share in the new Prosus, which will list on the Euronext stock exchange in Amsterdam next month.

In short, the swapping of the Naspers M-share for a Prosus share is seen as the sale of one share and the purchase of another – and CGT is payable.

The cost to shareholders of the M-share is zero, because they would not pay for it. But the price of the M-share that shareholders are deemed to be selling straightaway to buy their Prosus shares would be equal to the market price that investors are willing to pay for Prosus shares when the market in Amsterdam opens for trading.

The Prosus opening price, a calculation based on a weighted average of prices over a few days of trading, is taken as the selling price that shareholders received for the M-shares in the deemed sale-and-buy transaction.

The total capital gain is thus the full value of a shareholder’s Prosus shares.

Naspers confirmed how the South African Revenue Service (Sars) sees the transaction, as well as the deemed selling price of the M-shares and the purchase of Prosus shares. “A Naspers shareholder who receives Prosus shares will be issued with one Prosus share for every Naspers [share] held. There will be an acceleration of CGT on the value of the Prosus shares received for SA shareholders.”

In response to questions from Moneyweb, Naspers said: “The transaction is due to close in September this year and SA taxpayers are required to declare CGT to Sars.”

It added that the group is not able to provide tax advice and recommends that shareholders seek tax advice to ensure that they fully understand the implications based on their individual circumstances.

Impact will be felt individually

This same disclaimer applies to Moneyweb or any other media platform that attempts to unpack the issue. This is because the number of shares an investor holds, as well as their taxable income and individual tax rate, will determine their CGT liability.

A big unknown at this stage is how the market will react when Prosus lists on September 11. There has been much argument about how much of a discount to net asset value (NAV) its listing will unlock. The Naspers share price might already reflect it to some extent.

SA tax legislation provides for tax on 40% of any capital gains on certain assets, which includes gains on shares, with relief of an annual exclusion of R40 000.

If an investor owns 100 Naspers shares, 40% of the value of the Prosus shares – minus the R40 000 relief – must be declared and added to their annual income for purposes of tax.

CGT liability on 100 Naspers shares (example)

Before transaction  
100 Naspers shares @ R3 500 R350 000
After transaction  
100 Naspers shares @ R2 500 R250 000
100 Prosus shares @ R1 000 R100 000
Capital gain on 100 Naspers M shares R100 000
Annual exclusion R40 000
Capital gain R60 000
Taxable capital gain @ 40% of gain R24 000
Tax payable at 45% marginal rate R10 800

Source: Author’s calculations

The example assumes that a shareholder holds only 100 shares and makes the assumption that they pay the highest tax rate. It also assumes a price of R1 000 per Prosus share and that the Naspers price will fall by an equal amount once Prosus starts trading in Europe. These assumptions are obviously an oversimplification, but they do give an idea of how to tackle the calculation.

It is important to note that the calculations do not hold true for parcels of 100 shares. If a shareholder owns 500 shares, they only get the R40 000 annual exclusion once and not for every 100 shares. Furthermore, there are probably a lot of ‘poorer’ Naspers investors who are in a lower tax category than the highest marginal tax rate used in our example.

Keeping a cool head

At worst, Naspers shareholders would need to sell a few shares to cover the CGT liability.

Over the longer term, the net effect of CGT is negligible. Firstly, CGT on the healthy gains in Naspers’s share price will have to be paid sometime. Shareholders are forced to pay some of it now.

After this, the new base cost for purposes of CGT for a South African investor’s Prosus shares will be the opening price of Prosus instead of the zero cost of the M-shares. Once again, shareholders are paying some of the CGT now instead of later.

One can also argue that the price of Naspers shares will decline sharply on the JSE after the unbundling and listing of Prosus which will reduce investors’ capital gain on Naspers to offset the gains on Prosus.

In short, shareholders should not let the issue of CGT send them rushing to the alternative option that Naspers offered – receiving additional Naspers N-shares rather than Prosus shares. In this case, while no CGT would be payable in the current tax year, Sars will come for its share when investors sell their shares at a later date.



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Tricky. Is the base cost assumed to be zero? What happens to index trackers or top 40?

Seems to me that the base cost = 0, as the shares are gained for no cost.

Has anyone calculated how much additional revenue this is likely to bring to the SA fiscus?

To be looted……

If they really wanted to looted, they would have issued a special legislation change increasing CGT. The man on the street is not impacted by CGT. I think they missed a massive revenue opportunity here – I would have increased CGT.

Much less than you’d think. Bear in mind it will be zero from ETFs, unit trusts and retirement funds.

Not sure why it’s a surprise, a similar ‘foreign return of capital’ was taxed when NEPI and Rockcastle merged a couple of years ago. Cash still has to be found to pay the tax even though there’s no cashflow from the transaction.

Of course, if the price subsequently drops, or the rand strengthens, there’s a bit more pain – NPR was deemed sold at R170-odd.

There is a need for a rollover provision in these cases. I expect most Naspers shares are held in institutional portfolios, where the gain is effectively rolled over (if not exempted entirely) – why should the small shareholder always be hammered ?

A windfall for the gangsters. Ace…a new Roller, maybe a yacht! Come on all this lovely lolly to pinch!!

OK, but what if these shares are held in an annuity of sorts.. My advisors tell me that in that case no CGT or Dividend Tax. True/False

End of comments.



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