Print Page
News & Press: TaxTalk

When Liquidation Becomes a Certainty: The Treatment Of Dividends

01 August 2007   (0 Comments)
Posted by: Author: Kyle Mandy
Share |

When Liquidation Becomes a Certainty: The Treatment Of Dividends

Certain amendments were made to the definition of dividends in section 1 of the Income Tax Act in November 2005.This article examines the implications of these amendments for taxpayers and whether or not they have had the desired effect.

According to the Act, a dividend is essentially any amount distributed by a company to its shareholders and the Act also regulates what constitutes an amount distributed when a company is wound up, liquidated,deregistered or its corporate existence finally terminated. In such an event certain capital profits are excluded from being an amount distributed and hence do not constitute a dividend as defined.The amendment at play here refers to profits distributed in anticipation of winding up.

Prior to this amendment, this paragraph of the definition only applied to distributions made in the course of winding up.Any distributions made in anticipation thereof fell to be dealt with in terms of  paragraph (b).The Memorandum on the Revenue  Laws  Second Amendment Bill,2005, gave  the  reason for the amendment as follows:"Paragraph (a) of the definition of dividend provides for an  exclusion of profits of a capital nature earned before 1 October 2001 which are distributed by a company  that  is being wound up, liquidated or the corporate existence of which is finally terminated. A similar exclusion is already contained in the STC provisions. It is proposed that the definition of dividend be aligned with the STC exemption as far as deregistration, final termination of a company and a distribution in the course or anticipation of winding up, liquidation, deregistration or final termination of a company are concerned.”

The rationale for wanting to align the dividend definition with the Secondary Tax on Companies (STC) exemption contained in section 64B(5)(c) of the Act is conspicuous by its absence from this explanation.Where a distribution is made in the course of a termination event, it is submitted that the amendments, in general, will have no effect.The issue with which we are concerned is the treatment of those distributions made  in  anticipation of a termination event .The first problem that arises in this regard is with respect to what constitutes a distribution in anticipation of a termination event.

The Act states that certain steps must have been taken within six months of the distribution in order for it to qualify for the exemption.They can be summarised in general  terms as follows :

-The company has lodged a resolution authorising the liquidation or winding-up or has submitted the       written statement required for a deregistation;

-The company has disposed of all assets and settled all liabilities;

-The company has submitted a copy of the above resolution or written statement to SARS; and

- All the returns or information required to be

When liquidation becomes a certainty:The treatment of dividends Certain amendments were made to the definition of dividends in section 1 of the Income Tax Act in November 2005.This article examines the implications of these amendments for taxpayers and whether or not they have had the desired effect. www.taxtalk.co.za submitted or furnished to the Commissioner in terms of any Act administered by the Commissioner by the end of the period have been submitted or furnished or arrangements have been made with the Commissioner for the submission of any outstanding returns or furnishing of information.

However,paragraph (a) of the dividend definition does not make any reference to section 41(4) of the Act and nor does it contain any other requirements that would need to be met in order for a distribution to qualify as being in anticipation of a termination event for purposes of the definition.

A subjective test

The result is that, for purposes of determining whether a distribution is in anticipation of a termination event as anticipated in paragraph (a) of the dividend definition, it is necessary to apply only a subjective test that goes to the state of mind and intentions of the company at the time of the distribution with regard to the termination of the company.However, the fulfillment or non-fulfillment within a reasonable period of time of certain of the steps referred to in section 41(4) of the Act may well be indicative of the intentions of the company.

While section 64B(5)(c) of the Act also requires a subjective test of intention on the part of the company, in the first instance,it also contains objective criteria that would need to be met in order for the provision to apply.

The result is that in so far as this aspect is concerned there is a discrepancy between paragraph (a) of the dividend definition and section 64B(5)(c) of the Act and it cannot be said that these two provisions are aligned.

In summary, the amendment does not achieve the objective of aligning the dividend definition with the STC exemption for termination events.More importantly, it has potentially disastrous consequences for the shareholders of any company distributing capital profits from the disposal of an asset in anticipation of a termination event.It is considered that these consequences were neither foreseen by the legislature nor intended and should therefore be corrected.In the meantime shareholders face potentially substantial tax liabilities arising from distributions of capital profits by companies and it is therefore critical that companies intending to make such distributions seek specialist tax advice before doing so.

Question the amendment

Of course taxpayers would be well within their rights to question why this amendment was made in the first place and, secondly, why nearly two years after the amendments were made nothing has been done to rectify the situation.The answer to the first question is, in my view, the result of ill-considered and unnecessary amendments being proposed to the legislation and insufficient time being allowed for comments to be made in respect thereof.In so far as the second question is concerned, I'm not sure that there is a satisfactory answer and a further question arises as to whether any future amendments to rectify the situation will be backdated to the date that the original amendments became effective. 

Source: By Kyle Mandy (TaxTALK)


 

WHY REGISTER WITH SAIT?

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.

  • Tax Practitioner Registration Requirements & FAQ's
  • Rate Our Service

    Membership Management Software Powered by YourMembership  ::  Legal