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Thread: Capital dividend tax

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    Capital dividend tax

    Good Day
    I have a dormant CC which owns a property. I wish take the property out of the CC and transfer it into the member's own name, and then liquidate the CC. This would require selling the property to the individual. Problem is that the CC will then have cash which needs to be distributed. Is there a type of capital distribution that can apply ( I believe there is such a system in Canada for example). In other words, since the distribution is in respect of the proceeds of a fixed asset and not as a result of a trading profit, can this be distributed without DWT. (the member has owned the CC for along time, and the land has been owned by the CC for a long time. The land was bought with a particular purpose in mind, but this is no longer possible, so the whole project is to be scrapped.

    Thanks

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    Diamond Member Justloadit's Avatar
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    Why you want to do this?
    I see this as a major financial cost.

    I stand to be corrected here, and below are some of my thoughts, it may not be the case, and professional advice should be obtained from your auditor.
    I am sure that there is going to be a 7% transfer cost.
    Depending on the value of the property sold at and the property valued by a qualified land evaluator, versus the value at which it was purchased at, it may attract CGT to the company.
    Depending on how the company obtained the property originally, a loan account, which probably was never paid, will then attract tax for having benefited from a interest free loan.
    Once the book entry has been made, how does the new owner get his money back?
    SARS may see this as income, and may tax you up to 40% of the value depending on how the amount affects your yearly income.

    Much easier to resuscitate the company and continue as is. If the property is sold, then there is only a transfer of the shareholder, and not a property sale, so there is a saving on the transfer fee. The problem then becomes the buyer's, if he wishes to change, precisely as you may experience here to change it to a persons name.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar and LED lighting solutions - www.microsolve.co.za

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    alanc (13-Oct-16)

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    Thanks for the reply
    The reason this needs to be done is that we have been trying to sell the CC for years and the fact that it is CC owned is a big stumbling block. Some just don't understand the concept and it gets too messy for them, but those that are au fait with these matters realise that if the CC shares are bought, the original cost price of the land still stands as it is in the CC, so when they either sell the land or make a profit in the CC, they will have to pay income tax on the appreciation in the land from day 1. They cannot use the price they paid for the shares as the base cost for the land. The original cost of the land is much lower than current value. The purchase price of the land was funded by a non interest bearing loan, which I s still there. I expect to pay transfer duty, and GCT. However the CGT is diluted by the length of time that the land was held before the introduction of CGT. This will effectively halve the amount of CGT.
    And yes, the question is hot does the member then get the cash out of the CC. It would not be nice to have to pay DWT as well.
    I realise this would be an expensive exercise, but if it had to be done in the future it would be worse, assuming the land appreciates some more. Regarding the sale of the shares, I believe that if a CC is sold and that CC owns land, then transfer duty is payable anyway.

    So the question still remains - in this scenario, where the CC realises a capital asset, is there a way of getting the cash out of the CC without having to pay dividend tax as well. In other words is there a way of distributing the proceeds of a capital transaction - it clearly is not a normal line of business transaction as the land has been held for over 25 years.

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    Diamond Member Justloadit's Avatar
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    Quote Originally Posted by alanc View Post
    Regarding the sale of the shares, I believe that if a CC is sold and that CC owns land, then transfer duty is payable anyway.

    So the question still remains - in this scenario, where the CC realises a capital asset, is there a way of getting the cash out of the CC without having to pay dividend tax as well. In other words is there a way of distributing the proceeds of a capital transaction - it clearly is not a normal line of business transaction as the land has been held for over 25 years.
    No When the C.C. is sold, it does not pay transfer fees, as the C.C. is sold as an ongoing concern.

    With regards to the capital, I suggest that you contact an auditor who is far familiar with the tax laws to advise your best way forward.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar and LED lighting solutions - www.microsolve.co.za

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    You can repay the interest-free loan in part. But as far as I am concerned, you will still have to pay Dividend's tax.

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    Quote Originally Posted by Justloadit View Post
    No When the C.C. is sold, it does not pay transfer fees, as the C.C. is sold as an ongoing concern.
    That is true if it is commercial property. If the company (or cc) is a "residential property company", which means a company :
    1. that holds any dwelling-house, holiday home, apartment, similar abode, improved or unimproved land zoned for residential use (including any real right thereto) other than an apartment complex, hotel, motel, etc., consisting of 5 or more units used for regular or systematic renting to 5 or more persons not connected to that company and other than any fixed property of a vendor forming part of a VAT registered enterprise, or

    2. where the fair value of the property comprises more than 50% of the aggregate fair value of all the assets (other than financial instruments) held by that company on the date of acquisition of an interest in that company.

    then it is subject to either transfer duty or VAT.

    So the question still remains - in this scenario, where the CC realises a capital asset, is there a way of getting the cash out of the CC without having to pay dividend tax as well. In other words is there a way of distributing the proceeds of a capital transaction - it clearly is not a normal line of business transaction as the land has been held for over 25 years.
    Unfortunately no. Dividends are actually paid from retained income and any other distributable reserves and are always subject to withholding tax where the shareholder is a natural person.

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