SARS recently issued Binding Private Ruling (BPR) 124 that dealswith the income tax and capital gains tax consequences arising from the repayment of shareholders’ loans from the proceeds of a new issue of redeemable preference shares (a new issue of shares) under technically insolvent circumstances.
The Applicant (a South African private resident company) has an assessed loss brought forward from the previous years of assessment. The Applicant continued to trade in the current year of assessment, but is incurring further losses. The Applicant’s operations are mostly financed through interest bearing loans from shareholders and from banks. The Applicant is heavily burdened with debt and interest payments arising therefrom to the point that its liabilities now exceed the book value of its assets.
In view of the Applicant’s current financial position the shareholders wish to recapitalize the company with a new issue of shares. The Applicant will utilise the proceeds from the new issue to repay its shareholders’ loans in order to improve the solvency of the company and reduce the interest burden on the company.
The ruling made in connection with the proposed transaction is as follows:
The repayment of the shareholders’ loans from the proceeds of the new issue of redeemable preference shares will not be regarded as a concession granted by or a compromise made by the Applicant’s shareholders with the Applicant as envisaged in section 20(1)(a)(ii).
Paragraph 12(5) of the Eighth Schedule will not be applicable to the repayment of the shareholders’ loans.
The payment of the subscription price to be made by the Applicant’s shareholders in cash will qualify as expenditure actually incurred for the acquisition of the new redeemable preference shares for purposes of paragraph 20(1)(a) of the Eighth Schedule.
The fully paid subscription price for the new redeemable preference shares will qualify as "contributed tax capital” as defined in section 1(1).
The private ruling is valid for a period of 1 year from 2 April 2012.
Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.