[Question] Reduction in Members Contribution to Loan Account?

[ryancohen]

This may seem like a silly question, or the answer may be obvious, but I'm really stumped...

If a CC has R10,000 invested as Members Contributions and was established a few years back, is it at all possible to reduce the Members Contributions to R100 and post balance to the members loan account? There is only one member of the CC.

The intention is to credit the member's loan account with the net reduction (Cr R9,900). I'm uncertain if the above would have a CGT effect (increased value in members interest) or any other tax effects though?

I've tried CIPC and Google for some answers, but coming up empty. Any advice or pointing me in the right direction would be greatly appreciated

[Justloadit]

I do not believe there is CGT involved, the entry is simply repaying the initial loan to the company.

What may be an issue is that there was no interest charged by the member to the company for the use of the money.
This would show an expense to the company, but an income to the member, which off course will attract tax, if the interest the member earned during the tax period exceeds "I think" of R10,000.00

[CLIVE-TRIANGLE]

It is actually two transactions.

The reduction of members contributions, is subject to Sec 39 of the Act:

1)Payment by a corporation in respect of its acquisition of a member's interest in the corporation shall be made only-
a)with the previously obtained written consent of every member of the corporation, other than the member whose interest is acquired, for the specific payment;
b)if, after such payment is made, the corporation's assets, fairly valued, exceed all its liabilities;
c)if the corporation is able to pay its debts as they become due in the ordinary course of its business; and
d)if such payment will in the particular circumstances not in fact render the corporation unable to pay its debts as they become due in the ordinary course of its business.

2)For the purposes of subsection (1) "payment" shall include the delivery or transfer of any property. I would think it includes offset against a loan.

It would mean you need to submit a CK2 to reflect the change in the Rand value.

[dellatjie]

@ Justloadit

If you are referring to the yearly interest exemption, it is R22 800 for individuals younger than 65, and R33 000 for individuals older than 65 years of age as at the last day of the year of assessment.

[ryancohen]

Hi All, thanks very much for the replies

I want to reduce Members Contributions from R100,000 to R100 and then post to the loan account. I.e. Dr Members Contributions and Cr Members Loan.

There wouldn't be any interest charged on the original Members Contribution of the CC (it's like Share Capital is to a Company) as it wasn't a loan. Per Clive-Triangle's advice, the CC meets all the requirements (assets outweigh liabilities, resolution passed etc). It's the Members Contribution I'm looking to reduce and pay back to members. I think my original post was ambiguous and was interpreted as paying back loan.

Where I am confused, is if there is any form of tax effect when one reduces Members Contributions?

To simplify, say I was to reduce the Members Contributions (Meeting, Resolution, Lodge CK2) from R100,000 to R100 and 'refunded' the member R99,900 of the initial capital invested (at original value). What would the tax implications, if any, be?

[Justloadit]

The manner in which you place your question, sounds like selling of shares, which I think is not what you are referring to.

The way I understand this, A member contributed cash to the business so that it could start up, as the company never had money to start. It has made a success of the use of this money to produce a sustainable entity. It now has liquid capital to repay the original contribution of the member. In my books this is a loan, the fact that no interest was paid/levied does not detract from this. So effectively as far as the member is personally concerned, he is getting his money back. The non levied interest is another mater, and tax experts will be able to make this clear.

The company to have been able to recover the initial "loaned" amount, means it has made a profit, and so would have paid tax on this profit, before paying out the loan account.

[ryancohen]

The manner in which you place your question, sounds like selling of shares, which I think is not what you are referring to.

The way I understand this, A member contributed cash to the business so that it could start up, as the company never had money to start. It has made a success of the use of this money to produce a sustainable entity. It now has liquid capital to repay the original contribution of the member. In my books this is a loan, the fact that no interest was paid/levied does not detract from this. So effectively as far as the member is personally concerned, he is getting his money back. The non levied interest is another mater, and tax experts will be able to make this clear.

The company to have been able to recover the initial "loaned" amount, means it has made a profit, and so would have paid tax on this profit, before paying out the loan account.

I'm sorry, I am confusing the question. You're right, I'm not referring to selling the shares, but rather reducing the share capital. Although, this is a CC so it's the Members Contributions.

This is where I'm confused. It's not a loan, it's members contribution (/share capital) that was invested into the company with no expectation to repay and never loaned to the entity. However, the company now wishes to reduce the contribution/share capital of the cc/company (it's not the members/shareholders wanting to sell or transfer to a third party).

I would think that it would just be a 'refund' of the interest/capital at equal value contributed/invested. So no CGT or other tax effect. However, by reducing the members contributions/share capital from R100,000 to R100, effectively the members/shareholders are receiving R99,900 benefit out of their company tax free.

It seems legit to me, but just want to ensure that I'm not exposing the members to some schedule or Act that SARS has in place to prohibit essentially converting capital to loan without any tax effect?

[Justloadit]

Any company to operate requires working capital.
When any company starts, it has no capital, so it has to acquire this capital, and there only 2 ways, either capital is donated to the company, or there is a loan made to the company. Donated capital is usually for NGO's and non profit organizations.

Once a company is established, then the company runs on working capital. There are 3 ways for this capital to have originated. One is the original 'donated capital', the other off course is the "loaned capital" , and the third one now, is capital it has generated from it's operations after paying tax, known as "Nett Profit".

[CLIVE-TRIANGLE]

Where I am confused, is if there is any form of tax effect when one reduces Members Contributions?

A reduction of members contributions does in fact amount to a disposal thereof by the member, even when it is to the cc. There is no escaping that.

If it is reduced by R99,900, and the cc either pays that amount out or credits it to the members loan account, there is no capital gain in the hands of the member.

The member can "sell" it for whatever amount he chooses and that amount is the consideration. Base cost is exactly what it was. So capital gain = disposal less base cost, which in your case is presumably nil.

[ryancohen]

A reduction of members contributions does in fact amount to a disposal thereof by the member, even when it is to the cc. There is no escaping that.

If it is reduced by R99,900, and the cc either pays that amount out or credits it to the members loan account, there is no capital gain in the hands of the member.

The member can "sell" it for whatever amount he chooses and that amount is the consideration. Base cost is exactly what it was. So capital gain = disposal less base cost, which in your case is presumably nil.

That makes sense. Thanks very much