Tax anomalies with odd-lot offers
08 June 2012
Posted by: SAIT Technical
By Emil Brincker (Cliffe Dekker Hofmeyr Tax Alert June 2012)
An odd-lot offer is defined in the listing requirements of the Johannesburg Stock Exchange as an offer where a listed company intends reducing administrative costs resulting from a large number of "odd-lot" holders. An odd-lot is interpreted as a total holding of:
- Less than 100 securities; or
- 100 or more securities provided that it can be illustrated that the cost associated with a holder disposing of such number of shares is equal to or exceeds the total value of such number of securities.
To the extent that a company embarks on an odd-lot offer on the basis that it repurchases the relevant securities, the question arises how to deal with the proceeds associated with the odd-lot offer. A dividend is defined in s1 of the Income Tax Act, No 58 1962 as any amount that is transferred or applied by a company for the benefit or on behalf of a person in respect of a share in that company. It includes an amount transferred as consideration for the acquisition of any share in the company. The only instance where one is not dealing with a dividend is if the purchase price results in a reduction of contributed tax capital of the company or constitutes an acquisition by a company of its own securities by way of a general repurchase of securities. In other words, should one be dealing with a general repurchase of securities by a company, one would not be dealing with a dividend.
In the context of an odd-lot offer, however, one is not dealing with a general repurchase of securities, but the offer is made to targeted shareholders, that is if for instance holding less than 100 securities. Therefore, one cannot argue that the purchase price, if funded out of reserves and not contributed tax capital, does not constitute a dividend.
The problem faced with companies that embark on odd-lot offers and in circumstances where the purchase price is funded out of reserves is that the purchase price then constitutes a dividend. The purchase consideration may thus be exempt in the hands of the sellers. However, the consequence is that the dividend may be subject to dividends tax, especially to the extent that the shareholders do not constitute companies. If an individual holds shares that are sold in terms of the odd-lot offer, a dividend is in fact received by such shareholder and dividends tax must be accounted for. Even in the case of a company, dividends tax will have to be deducted unless the company that is a shareholder provides the listed company embarking on the odd-lot offer with an undertaking and a declaration that it is in fact exempt from a dividends tax perspective.
Unfortunately, it appears that it is not practically possible to implement the tax consequences of this type of transaction to the extent that an odd-lot offer is embarked on. This is especially relevant in the context of the sellers having to receive certificates pertaining to the fact that they have received dividends. The systems do not seem to have been set up for that purpose and an administrative nightmare may well ensue.
It is suggested that the definition of a dividend be amended on the basis that a purchase price paid in respect of an odd-lot offer should also not constitute a dividend. This should be similar to the scenario where a company embarks upon a general repurchase of securities as opposed to a specific repurchase of securities. The way in which the legislation is currently drafted, implies that the proceeds from the sale of the shares will be deemed to be a dividend, with the resultant consequences. It makes logical sense that the proceeds from an odd-lot offer should not constitute a dividend and an amendment to the legislation is urgently required given the anomaly that has currently arisen.