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The income tax implications of a return of capital

Wednesday, 20 September 2017   (0 Comments)
Posted by: Author: Alexa Muller
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Author: Alexa Muller (ENSafrica)

In terms of the South African Income Tax Act, 1962 (the “Act”), distributions received by or accrued to a shareholder of a company may constitute either a dividend or a return of capital – each of which would give rise to different tax implications for the shareholder or company concerned.

The term “dividend”, as defined in section 1 of the Act, excludes, inter alia, an amount distributed to the extent that the amount results in a reduction of the “contributed tax capital” of the company making the distribution. A “return of capital”, as defined in section 1 of the Act, means any amount transferred by a South African tax resident company for the benefit for or on behalf of any person in respect of any share in that company to the extent that that transfer results in a reduction of contributed tax capital of the company (subject to certain exclusions, which are not relevant for present purposes).

Broadly speaking, “contributed tax capital” is defined, in relation to a class of shares of a company, as the consideration received by or accrued to that company for the issue of shares of that class, reduced by so much of the amount as the company has transferred for the benefit of a shareholder and which has been determined by the directors of the company to reduce the contributed tax capital of the company.

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