Sale of minority interest in CC

[Briano]

2 members hold a 75% and 25% interest in 3 separate CC's respectively. The majority member buys out the 25% interest from the minority member for a total purchase for all 3 CC's for R 7m. To settle the purchase price the majority member pays half of the purchase price from his personal bank account and then uses the property in the property CC to raise finance to settle the other half. The funds are paid directly to the majority member who then settles the minority shareholder. How is this transactions reflected in the books of the property CC and what are the tax implications

[Dave A]

I've moved this to the accounting forum where it's more likely to get attention from the folk who can help you.

[HR Solutions]

Hi Brian. Yeah we are all good here thanks. And You ?

[CLIVE-TRIANGLE]

Hi Briano
There are financial, income tax, capital gains tax and securities transfer tax issues.

However they all also hinge on whether the members have loan accounts (and their direction), does the purchase price include the loans accounts and what is the retained income.

[CLIVE-TRIANGLE]

Lol, seems not after all.

[Briano]

Thanks for your reply Clive.

Yes, the majority member who purchased the 25% interest currently has a debit loan account of R 1,6m and there is a small accumulated loss of about R 200k. The minority member had a credit loan account of R 600k which was part of the purchase price.

[CLIVE-TRIANGLE]

Hi Briano, thought you went away

Broadly, these are the effects:
FINANCIAL
1. Members contributions simply out at one member, in at the other.
2. R3.5m represents a loan to the majority member in the property cc, or a loan to the other cc. As he has a debit loan, it might make sense to keep that debit loan in one place. It needs to be an interest bearing loan. See tax implications.
3. The loan account of the seller R600k is now the loan account of the purchase (1,600k + 3,500k - 600k)

TAX
1. First is STT. The CC's are liable for it and it must be paid within 2 months of transfer. It is calculated at 0.25% of the proceed but only the proceed attributable to the shares, so excluding the value of loan accounts.
2. The excess interest on the loan to the cc, over the loan to the member, is non-productive interest and represents a tax adjustment.
3. Interest on the loan to member should be set at prime or more. Presently, the amount of uncharged interest on soft loans will be regarded as deemed dividends. You need to be careful of the period when the R1.6 debit loan arose; SARS could regard that whole amount as deemed dividend.

CGIT
1. The sellers have realized a capital gain. Base cost is their members contributions. The proceed is R7m less the value of all the loan accounts.

I think that covers most of it

[wynn]

Then make sure you CYA (cover your arse) by notifying any creditors by registered mail of your resignation and cancellation by return registered post of any sureties you signed as a member just in case five years from now they come to bite you in that same A you were supposed to C.

[CLIVE-TRIANGLE]

Ain't that the truth! And bear in mind that it only effects transactions from that date, unless the creditor releases you (fat chance)

[Briano]

Thanks for your valuable comments Clive and Wynn. You have pointed me in the right direction and raised the critical points to watch out for.

Clive, regarding point 2 under TAX, are you saying that if it is a loan to the member the interest will be deductible but if it is a loan to one of the other CC's it will be non-deductible.

As you point out the debit loan account could be regarded by SARS as a deemed dividend. How would that practically be applied? Does STC still apply to cc's? Since there are very little reserves in the CC, a dividend could effectively not be declared, is that correct?

[CLIVE-TRIANGLE]

Clive, regarding point 2 under TAX, are you saying that if it is a loan to the member the interest will be deductible but if it is a loan to one of the other CC's it will be non-deductible.

What I meant there was, if any of the cc's raises a loan to in turn make a loan to the member, that interest is non-productive, at least to the extent that it exceeds the interest on from the loan to the member (or to another cc). In transactions of that nature, SARS will ignore the corporate structure and couple the loan from to the loan to, even to the extent of deeming a dividend.

As you point out the debit loan account could be regarded by SARS as a deemed dividend. How would that practically be applied? Does STC still apply to cc's? Since there are very little reserves in the CC, a dividend could effectively not be declared, is that correct?

SARS can still deem it as dividend purely to levy dividend tax and leave you with the mess that it causes

[Dave A]

Just a thought:

What if the property owning cc bought the 25% shareholding in the other two cc's (instead of the shareholding being bought in the name of the majority shareholder)?

[CLIVE-TRIANGLE]

Only natural persons and special trusts ....

But the real problem is the underlying principle that the loan is to lend the member financial assistance, regardless of how it is structured

[Briano]

Thank you gentleman. Your comments have been very useful in assisting me to deal with the various problems that have presented themselves.

[Dave A]

Only natural persons and special trusts ....

Convert to a company.