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Does a share buyback reduce ‘contributed tax capital’?

16 July 2015   (0 Comments)
Posted by: Author: SAIT Technical
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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 issued shares?

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 company...” 

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 minutes. 

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. 

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision. 


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