A family trust owns 100% shares in a company that owns a family property. The company does not have a bank account and all the transactions go through the trust bank account and is recorded in a loan account. The property was sold in the previous year and
Author: Peter Surtees
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
1.The company’s balance sheet consists of share capital and retained earnings on one side and an asset consisting of the loan account on the other. The only way to get rid of retained earnings is to declare them as a dividend; there is no way to avoid that. Maybe the loan account has been building up over a number of years and the company has been paying dividends tax on the value of the interest forgone (I assume that no interest has been charged on the loan). If that is so, the dividends tax on the deemed dividend will be deducted from the dividends tax payable when the company actually declares the liquidation dividend. Relevant tax law in the Income Tax Act Section 64E(4)(a): “Where, during any year of assessment, any amount is owing to a company by—(i) a person that is (aa) not a company; (bb) not a resident; and (cc) a connected person in relation to that company…in respect of a debt, that company must, for the purposes of this Part, be deemed to have paid a dividend if that debt arises by virtue of any share held in that company by a person contemplated in subparagraph (i)”. You will agree that this extract accurately describes your client’s situation. So the company should have been paying dividends tax in respect of the loan. So, what the client must do is the following: a. Declare a liquidation dividend amounting to the retained earnings balance, and pay the dividends tax b. Pay the dividends tax by squaring the amount off against the loan account. C. Return the capital (contributed tax capital) to the shareholder, squaring the payment off against the balance of the loan account.
2.Use the same form DTR1 that you use for all dividends, liquidation and other. 3.You have entered “dividend value” on the form as the value of the dividend on one share. Nowhere on the form are you asked to indicate the number of shares, which would have enabled the system to multiply the two to arrive at the full amount paid. You should have entered the full amount of R2 829 062.50 as the dividend value. I wouldn’t try to correct the DTR1 form. That would be likely to cause havoc with SARS. I suggest you submit another DTR1 form reflecting a dividend value of R2 800 771.87 as if the company has declared a second dividend. That will give you the total dividend value.