Mr N, Mr T and Mr S each owned 50 shares in entity CT – 150 shares in total for which they paid R50.00 each in 2010. In 2015 Mr T sold his 50 shares to Mr W for R1.5million (assumption that Mr T declared this sale and paid capital gains on this in his per
Author: Peter Surtees
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
1. The sale of shares from T to W was between the two and the company was not involved. So the shares involved, let’s call them 51 to 100, retain their R50 share of CTC. T has, as you correctly point out, paid CGT on the uplift from R50 to R1.5 million, which is now the base cost in W’s hands. When the company buys back W’s shares, he makes a loss of R200 00. But the company has CTC of only R150. The directors may decide to ascribe only R50 to W’s shares; at most, they could ascribe the whole R150 to W’s shares. As you can see, the difference is minimal. W will be receiving a dividend of nearly R1.3 million. Relevant tax law Section 1(1) of the Income Tax Act: “’contributed tax capital, in relation to a class of shares in a company, means- …(b)(ii) the consideration received by or accrued to that company for the issue of shares of that class on or after 1 January 2011”. Section 1(1) of the Income Tax Act: “’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…but does not include any amount so transferred or applied to the extent that the amount so transferred or applied- (i) results in a reduction of contributed tax capital of the company”. 2. The R1.3 million will be a dividend as set out above. 3. Not the whole R1.5 million, only the R200 000 difference between the base cost and the proceeds. So W will have a capital loss of R200 000 and will pay dividends tax of nearly R260 000.