If a company who has a debit loan deregisters the company with the debit loan still owing to it, then is this a deemed dividend and what section in the income tax act is this scenario catered for?
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
My view is that there is a dividend here. My thinking follows:
In the Companies Act (section 1), unless the context indicates otherwise "distribution" means a direct or indirect-
(c) forgiveness or waiver by a company of a debt or other obligation owed to the company by one or more holders of any of the shares of that company …,
but does not include any such action taken upon the final liquidation of the company.
In the Income Tax Act (section 1(1)), unless the context otherwise indicates - 'dividend' means any amount … transferred or applied by a company that is a resident for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or applied –
(a) by way of a distribution made by; that company …
According CIPC, to deregister a company, the company must write a letter to CIPC. The following must be confirmed in this letter:
-
The company or close corporation is not carrying on business or is dormant; and
-
Has no assets, or because of the inadequacy of its assets, that there is no reasonable probability of the close corporation being liquidated (if third party, the statement must be supplemented with sufficient documentary proof confirming the statement …
In my view the company (the directors) will only be able to confirm that there is no asset if the loan disappeared (in a sense). The company therefore, in making this declaration, effectively said to the holder of shares (or its debtor), that it is not required to pay back the loan.
Because it is a debit loan, section 19 (or paragraph 12A) will not apply to the company, but it would apply to the holder of shares. But that is not relevant to the member’s request.
SARS, in their dividends tax guide, states the following:
“… an amount transferred or applied by a company ‘for the benefit or on behalf of any person in respect of any share of that company’ constitutes a ‘dividend’ as defined in s 1(1). The ambit of the definition is wide and includes, for example, the waiver of a loan owed by a beneficial owner of a share to the company if the reason for the waiver is causally related to and hence in respect of a share in that company. The waiver represents the transfer of an amount by way of a distribution by the company.”
I then think that it is an in specie distribution of an asset (the loan) and that the liability for the tax is the company’s. Not sure how SARS is going to get the money here – that problem is there if it is decided to declare a dividend and then apply set-off.
Paragraph 56 applies where the “creditor disposes of a debt owed by a debtor, who is a connected person”.