RCL Foods Limited announced the unbundling of Rainbow Chicken Limited. This unbundling involves the distribution of Rainbow shares to RCL Foods shareholders.
The move follows announcements on 4 June and 10 June 2024. Rainbow shares were listed on the Main Board of the JSE. Shareholders received the distribution of Rainbow shares on a pro-rata basis.
Closing Prices and Apportionment Ratio
The purpose of the announcement is to provide key financial details. These include the closing share prices and apportionment ratio for tax purposes.
Table 1: Closing Share Prices and Apportionment Ratio
| Company | Closing Share Price on LDT+1 (R) | Apportionment Ratio (%) |
|---|---|---|
| RCL Foods | 11.01 | 75.10232 |
| Rainbow | 3.65 | 24.89768 |
| Total | 14.66 | 100.00000 |
Shareholders need these figures for South African tax purposes. The apportionment ratio helps allocate the expenditure of RCL Foods shares.
Tax Principles
The unbundling is an unbundling transaction for South African tax purposes. It is defined under section 46 of the Income Tax Act. The distribution is classified as a dividend, not a return of capital.
The methodology to determine the cost for tax purposes of the shares remains the same. However, tax consequences differ based on whether shares are held as trading stock or on capital account.
RCL Foods Shares Held as Trading Stock
For shares held as trading stock, the Rainbow distribution shares will also be considered trading stock. The combined expenditure of RCL Foods shares and Rainbow distribution shares equals the expenditure before unbundling.
This follows sections 11(a), 22(1), or 22(2) of the Income Tax Act.
RCL Foods Shares Held on Capital Account
For shares held on capital account, Rainbow distribution shares will also be on capital account. The combined base cost equals the expenditure of RCL Foods shares before unbundling.
This is in line with paragraph 20 of the Eighth Schedule to the Income Tax Act.
Apportionment Ratio Calculation
Section 46(3)(a) of the Income Tax Act provides the method to determine expenditure allocation. The ratio is based on the closing market value of Rainbow distribution shares relative to RCL Foods and Rainbow shares.
The allocated amount reduces the expenditure of RCL Foods shares. This applies regardless of whether shares are held as trading stock or on capital account.
The interpretation follows the South African Revenue Service’s Binding General Ruling 29 (Issue 2). The portion of expenditure or base cost is determined by the ratio of closing market values on LDT+1.