The advent of dividends tax came with (and in some instances was preceded by) a host of concomitant changes to the Income Tax Act, No 58 of 1962 (Act) in respect of distributions made by companies.
Some of these changes include:
- A new definition of "dividend";
- introduction of the term "contributed tax capital"; introduction of the term "return of capital"; and
- amendments to Part XI of the Eighth Schedule to the Act in respect of the capital gains tax consequences of company distributions.
Essentially, the new regime pertaining to company distributions separates company distributions into dividends and returns of capital. Where a distribution constitutes a dividend, it is dealt with under the dividends tax provisions in Part XIII of Chapter 2 of the Act, and where a distribution constitutes a return of capital it is dealt with under Part XI of the Eighth Schedule to the Act.
It would, however, appear that in the rush to bring about the new regime an important element was left out in respect of distributions of assets in specie.
Obviously, the distribution of an asset in specie can constitute either a dividend or a return of capital. However, irrespective of the nature of the distribution, a base cost will have to be determined in respect of that asset in the hands of the recipient (assuming the asset is held on capital account by the recipient).
Previously, irrespective of whether the distribution of an asset in specie constituted a dividend or a capital distribution, its base cost in the hands of the recipient was determined by paragraph 76(3) of the Eighth Schedule to the Act, which read:
Any distribution of an asset in specie received by or accrued to a shareholder must be treated as having been acquired on the date of distribution and for expenditure equal to the market value of that asset on that date, which expenditure must be treated as an amount of expenditure actually incurred and paid for the purposes of paragraph 20(1)(a).
However, paragraph 76(3) was amended by the Taxation Laws Amendment Act, No 24 of 2011 with effect from 1 April 2012, and now reads:
Where a return of capital is effected by way of a distribution of an asset in specie, that asset must be treated as having been acquired by the person to whom the distribution is made on the date of distribution and for expenditure equal to the market value of that asset on that date, which expenditure must be treated as an amount of expenditure actually incurred and paid for the purposes of paragraph 20(1)(a).
It is clear from the above that paragraph 76(3) no longer deals with the case where the distribution of an asset in specie constitutes a dividend but only where it constitutes a return of capital.
Accordingly, there is no specific provision dealing with the base cost of a dividend in specie in the hands of the recipient. The general provisions under paragraph 20 of the Eighth Schedule to the Act cannot be employed as no expenditure will have actually been incurred by the recipient of the dividend in specie. In fact, if paragraph 20 is applied, it could yield a base cost of zero.
In the absence of a provision deeming the base cost of the dividend in specie in the hands of the recipient to be market value, there could potentially be double taxation. This is so because the company making the distribution will have already had to account for capital gains tax calculated using deemed proceeds equal to the market value of the asset in terms of paragraph 75. This is despite the fact that the company would also be liable for dividends tax in respect of the dividend in specie in terms of s 64EA(b).
It is therefore submitted that there is a lacuna in the tax legislation as it stands, and that the legislature should correct it in the 2012 amendment legislation.