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Thread: Transfer of shares & Capital Gains Tax

  1. #1
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    Transfer of shares & Capital Gains Tax

    Good day,

    I need assistance to unlock complicated legal and tax matter I'm dealing with

    A friend of mine started a company in 2008 (called it A) and was the sole shareholder
    In 2010 he was faced with challenges in personal life, divorce matter to be exact. So, he wanted to "protect" the company from being part of the divorce as the wife never knew about the business and was never involved in starting or runing it (but she somehow found out during the divorce that he had this company)
    So, we spoke and agreed that he will transfer all the shares (100%) to me
    Please note, no money/ cash changed hands here...we only did the transfer to me knowing that we shall tranfer back to him after the divorce

    In 2011, divorce still ongoing..we decided to form a Holdings company (call it H) and tranfer the shares from me to the holdings company
    Now, the holdings company owned 100% of company A. and I owned 100% of the holdings company (H)
    Again, no money changed hands here (our reasoning, I own 100% of both companies - being A and H)

    Now, this year...divorce still ongoing, we wanted to form a Trust whereby I will be the Trustee & Beneficiary (my friend will again not be part of this transfer and Trust to protect it from the divorce matter)

    So, we engaged a company secretarial to register the trust for us and do the transfer...and this is where the nightmare begins
    I, now have to pay capital gains tax for tranfering the shares to the Trust. But how can this be given the facts as follows:
    1. I never paid money to my friend in 2010 when he transfered shares to me (as such he never received any money)
    2. I never received any money in 2011 when we transfered to H (I was the owner of both A & H)

    The response was as follows:
    1. 2010 transfer - company A was revalued to be worth R 9 million when the transfer was done to me (even if no money changed hands) and as such my frien must now declare R 900k capital gains tax
    2. 2011 tranfer - no CGT as I was the owner of both A & H
    3. proposed 2012 transfer to Trust - company A valued at R 10,2 million and as such I'm deemed to have acquired for R 9m and now selling for R 10,2m and therefore must pay R 200k CTG
    That means combined we have to pay R 1,1m CTG plus interest and penalties as we declare after the facts

    Please help me understand the above, I honestly do not understand it as no money ever chaged hands on the transfers

    Thank you

  2. #2
    Diamond Member Justloadit's Avatar
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    I am no expert on this, however, the fact that no money changed hands is irrelevant as far as SARS is concerned. SARS is also not concerned the reason for the movement of the shares. SARS is only interested in the apparent value of the shares, at the time of each transfer. This means that whilst there was no financial payment made for the transfer of the shares, the shares have a market related value, and standing from the outside, on each share transfer, the value of the shares had more value, and this is what CGT is about, the increase in the value of the shares at each transfer, whether payment was made for them or not, there was an increase in value.

    I suggest you contact a tax practitioner who will be able to advise accordingly.

    P.S. With respect to the trust, over night it now has a substantial asset on the books, how did it acquire it? This will now require that the Trust make a loan to purchase the shares, it can not simply amass assets with out any finance. I suggest you also get a Trust attorney involved in order to advise you accordingly.
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    Hi SSS100

    Besides being a possibly complex issue that might become more clear once more detail is provided, I too am a bit confused by the details because the way I see it, donations tax is the issue, not CGT. Any asset disposed of for less than market value constitutes a donation equal to market value less proceeds. If that is the case then based on your numbers, it is almost certainly a bigger tax bill.

    The key to the calculations, in both cases, is the valuation of the shares, and for that one would need to analyse the financial statements.

    Sections 41 to 47 of the income Tax Act may also provide some relief with regards to restructuring provisions, it depends on the detail, but not in the case of the 1st transfer.

    Who done the valuations (and on what basis) and who provided the tax scenario estimate? (PM me if you like).

    On the face of it, the advice you have received is wrong, but as always the devil is in the detail.

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    Thanks for the input,
    The majot thing that confuses me now is the difference in amounts to work with:
    My scenario above was based on the value of the company as per the revaluation done using financial statements, But now I"m thinking is such a value the value of the shares?
    Or must the shares be evaluated for purpose of transfer value? That is to say how much will each share sell for in open market?
    I mean, looking at online share trading...I picked up that standard bank shares trade for about R 116.99. What makes such a vulue?

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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by SSS100 View Post
    I picked up that standard bank shares trade for about R 116.99. What makes such a vulue?
    It's the meeting point between sellers and buyers in an open market - essentially a combination of expected return on investment and market sentiment. Most importantly, this market value should not be confused with a company's book value.

    It sounds like the problem you're having is the transactions aren't happening at arms length and hence SARS is using its authority to tax the transactions at fair market value. If you're to contest their valuations, you'd need a professional valuation (or three).

    Given the revaluation comment - does this company happen to own any fixed property?

    ps. If Clive is right about the donations tax, the CGT assessment is going to be the least of your friend's worries.
    The trouble with opportunity is it normally comes dressed up as work.

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    Quote Originally Posted by Dave A View Post
    It's the meeting point between sellers and buyers in an open market - essentially a combination of expected return on investment and market sentiment. Most importantly, this market value should not be confused with a company's book value.

    It sounds like the problem you're having is the transactions aren't happening at arms length and hence SARS is using its authority to tax the transactions at fair market value. If you're to contest their valuations, you'd need a professional valuation (or three).

    Given the revaluation comment - does this company happen to own any fixed property?

    ps. If Clive is right about the donations tax, the CGT assessment is going to be the least of your friend's worries.
    It almost always helps to go back to basics and ask yourself what really took place here. If the shares were transferred for no consideration, then they were donated and no capital gain was realised.

    Normally, the only time an unrealised capital gain will be taxed is when a company is wound up for whatever reason (not necessarily insolvency) which clearly is not the case here.

    Now if you take the 1st transfer and combine it with the last transfer ... in other words from your friend to the trust, the situation is very much simplified and the detail I alluded to is, amongst other things, the exact dates of the transfers, whether tax returns for the affected years have already been submitted and assessed, and so on. There may still be a window of opportunity to right matters.

    Share valuations for private companies are often very subjective. Consider SARS' viewpoint:

    When is a disposal considered a donation?

    If any property has been disposed of for a consideration that, in the opinion of the Commissioner, is not an adequate consideration, that property is treated as having been disposed of by donation. The donor is liable for the payment of the donations tax. If the donor fails to pay the tax within the prescribed period, the donor and the donee are jointly and severally liable for the tax.
    The word "property" actually should be "asset".

    In your case, to get a feel for the appropriate valuation, take retained income plus any distributable reserves. I assume that the statements comply with IFRS which would mean fixed property is already stated at fair value.

    I am still worried as to who came up with the CGT scenario and why, it might have been for good reason and please see my comments in that light. Without the details......

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    Thanks guys, I will consult with my friend on the matter and post afterwards

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    But, the one thing for sure is that then person who gave him the R 9m & R 10m based that on the book value of the company

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    Quote Originally Posted by SSS100 View Post
    But, the one thing for sure is that then person who gave him the R 9m & R 10m based that on the book value of the company
    Depending on the nature of the company, that might be fair enough (particularly true of property holding companies - hence the question ).
    The trouble with opportunity is it normally comes dressed up as work.

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