Print Page   |   Report Abuse
News & Press: Donations tax

What Is Contributed Tax Capital?

21 October 2013   (0 Comments)
Posted by: Author: Andrew Lewis
Share |

Author: Andrew Lewis (CliffeDekkerHofmeyr)

The concept of contributed tax capital (CTC) was introduced into the Income Tax Act, No 58 of 1962 (Act) with effect from 1 January 2011. Despite the concept forming part of our law for a number of years now, the question still often arises - what is contributed tax capital?

The relevance of the concept of CTC is that it is one of the main exclusions from the definition of a dividend. A dividend is defined as any amount transferred or applied by a company that is a resident for the benefit of any person in respect of a share but does not include any amount transferred/applied that "results in a reduction of contributed tax capital of the company". A distribution by a resident company to its shareholders, which results in a reduction of CTC will thus not constitute a dividend. If no election is made by the directors of the company (or persons with comparable authority) that a distribution results in a reduction of CTC, the distribution will by default constitute a dividend (unless one of the other exclusions are applicable).

Before considering what constitutes CTC for purposes of the Act, it is important to appreciate that it is a tax concept. The accounting and company law classification of a particular distribution is now irrelevant. For instance, if for accounting purposes an amount is distributed out of profits, it will not constitute a dividend for tax purposes if the company elects to reduce its CTC. It is also worth noting that previously it was debatable whether or not it was possible to create negative reserves. Under the CTC regime, it is not possible to have negative CTC and any distribution after the CTC has been reduced to nil will thus constitute a dividend.

If we turn to the definition of CTC in s1 of the Act, it makes a distinction between the CTC of a company that is not a resident that becomes a resident on or after 1 January 2011 and the CTC of any other company. To obtain a general understating of the concept of company's CTC we only discuss the later scenario. In that instance, the CTC is an amount equal to the sum of:

  • the stated capital or share capital and share premium of that company immediately before 1 January 2011 in relation to shares in that company of that class issued by that company before that date (the so called pure share capital/premium); less 
  • so much of that stated capital or share capital and share premium as would have constituted a dividend, as defined before that date, had that stated capital or share capital and share premium been distributed by that company immediately before that date (the so called tainted share capital/premium); plus
  • the consideration received by or accrued to that company for the issue of shares of that class on or after 1 January 2011; less 
  • CTC has transferred on or after 1 January 2011 for the benefit of any person holding a share in that company of that class in respect of that share.

In simple terms, a company's CTC, in relation to each class of shares, is calculated by determining its effective date CTC (that is the pure share capital/premium reduced by the tainted share capital/premium) and adding any additional consideration received for the issue of that particular class of shares after 1 January 2011. If the directors (or similar authorised persons) decide to make a distribution to the shareholders and reduce the CTC as a result thereof, the CTC in respect of that particular class of shares must then be reduced proportionately. The CTC definition requires that a separate CTC balance is determined and maintained for each separate class of shares.

The above is a very high-level introduction in respect of what constitutes CTC. It is important to note that that CTC is essentially a tax concept. For a more detailed discussion on the topic, refer to the South African Revenue Service's draft Comprehensive Guide to Dividends Tax (the Draft Guide), which was recently released for public comment. The Draft Guide discusses these issues in detail, including the distinction between tainted and pure share capital/premium. It also provides some helpful guidance and examples on the determination of a company's CTC where a transaction is implemented using the company reorganisation rules in s42, 44 and 46 of the Act.

This article was first published on


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.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

Membership Management Software Powered by®  ::  Legal