Does a share buyback reduce ‘contributed tax capital’?
16 July 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: If a company
buys back its own shares, is that buy-back a reduction of the issued shares
(reduction of "Contributed tax capital”) or does the company now own its own
Or is the share buy-back a "dividend” under the new dividend
rules? I saw mention of this in the ENS article attached.
A shareholder held 20% of the issued shares of a company
that he bought for R 385 000. The company now wants to buy back 15% of the
shareholder’s shares. Does this decrease the total issued shares by 15% or does
the company now own the 15% in its own name?
A: The definition
of a ‘dividend' in section 1(1) includes: "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...(b) as consideration for the acquisition of any share in, that
company. It 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
The amount paid to the shareholder by the company to acquire
the share(s) would therefore constitute a dividend for tax purposes, except to
the extent that the payment results in a reduction of contributed tax
capital. It must be remembered that the
directors of the company or some other person or body of persons with
comparable authority must determine the amount that will reduce the contributed
tax capital. This must be evidenced from
The amount paid by the person for the shares (the R385 000
that you refer to) is not necessarily the contributed tax capital of the
company. It would only be that if the
amount was paid to the company when the shares were originally issued. If the person acquired the shares from
another person for the R385 000 the amount will be the person’s base cost and
the contributed tax capital must be determined from the company – it will
normally be the consideration received by or accrued to that company for the
original issue of shares.
We only dealt with the Income Tax Act consequences – in
other words we accept that the Companies Act provisions will be observed.
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