TaxNewsFlash-Africa

June 24, 2009
No. 2009-06

South Africa: Capital Gains Tax Implications of Capital Share Distributions

Since the introduction of capital gains tax in the South African tax regime in October 2001, the taxation of so-called capital distributions has become relevant.

A capital distribution, by definition, is a distribution by a company to its shareholders that:

Does not constitute a dividend (e.g., the return of share capital or share premium or a distribution of certain pre-acquisition profits); or
Constitutes a liquidation dividend which is exempt from secondary tax on companies.

Initially, the capital gains tax implications of capital distributions were delayed until such time as the shares, in terms of which the capital distribution was received, were disposed.

Capital Gains Tax (CGT) Distributions

According to the Explanatory Memorandum accompanying the legislative amendments, taxpayers were using capital distributions to disguise the sale of share transactions, thereby avoiding the imposition of capital gains tax. This would be achieved by shareholders receiving capital distributions (that could potentially even exceed the shareholders expenditure in relation to the shares), thereby realising value from such distributions but potentially never selling their shares and thus never triggering the capital gains tax liability.

In light of the perceived abuse, the law was amended to trigger an earlier or immediate part disposal of the share (and hence a capital gains tax liability). While the taxation of capital distributions prior to 1 October 2001 (see above) has not changed, the law now provides for:

How to Calculate Capital Gains Tax (CGT)

Consider the following example.

Facts: Assume an individual taxpayer owns a share with a market value of R1,000 on 1 July 2011, which was acquired for R800 (its base cost) during 2003. In 2006, the taxpayer received a capital distribution of R100 in respect of the share. The capital distribution is deemed to be a part disposal of the share on 1 July 2011.

Calculation: 10% (i.e., the R100 capital distribution divided by the R1,000 market value on 1 July 2011) of the base cost (R80) is allocated to the deemed part disposal (R100). A R20 taxable capital gain (R100 CGT proceeds less R80 CGT base cost) is realized by the taxpayer on 1 July 2011.

1 July 2011 taxation date - Practicalities

Record information: By 1 July 2011, the capital distribution(s) relating to a share may have long been forgotten. To provide for accurate determination of capital gains tax, prudent taxpayers will consider taking pre-emptive measures to record details of capital distributions for future reference. The onus rests on the taxpayer.

Payment of tax: The date when the tax liability arises (1 July 2011) will not coincide with the cash receipt (by way of either the capital distribution or disposal of the shares). Provision will have to be made for the cash needed to settle the future capital gains tax liability (as part of provisional tax or otherwise during the 2011 or 2012 year of assessment).

Deferred tax: The fact that capital distributions between 1 October 2001 and 1 October 2007 will give rise to capital gains tax by 1 July 2011 (the latest), needs to be addressed in the accounting records of corporate taxpayers. In terms of current accounting statements and practices, a deferred capital gains tax liability may need to be recognized for accounting purposes (regardless of the company’s future plans in respect of the share/s in question).

For more information, contact a tax professional with KPMG in South Africa:

Roné la Grange, +27 (0) 11 647 5721, rone.lagrange@kpmg.co.za

Marianna Djonis, +27 (0) 11 647 7129, marianna.djonis@kpmg.co.za

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