CGT on sale of membership in cc

[J7J]

Hi,

One of the members wants to sell his 30% membership to the 70% member for no consideration or R30 (cost of membership).

The cc still owes the 30% member R40,000 on his loan account.

What is the base cost of the 30% membership? Would it be best to sell at Rnil or R30?

Thanks!

[CLIVE-TRIANGLE]

Hi J7J, that's two separate CGT issues.
1. Members contributions. Base cost is whatever he actually paid for it. Presumably it is R30, unless he bought it for more from someone else.
2. His loan account. Base cost is the balance on date of disposal.

[J7J]

Hi J7J, that's two separate CGT issues.
1. Members contributions. Base cost is whatever he actually paid for it. Presumably it is R30, unless he bought it for more from someone else.
2. His loan account. Base cost is the balance on date of disposal.

Thank you so much, Clive!

There are two possible scenarios:

1) They pay him R30 for his membership, he has Rnil CGT on this. The loan remains in the books as being payable and they repay the loan as and when they have the funds. No CGT implication on the loan.

2) 1) They pay him R30 for his membership and his loan account (in essence he writes off the balance of the loan owed to him). Will this be a CGT loss of R40,000 for the member and a R40,000 CGT gain for the cc due to the deemed disposal?

Further advice will be greatly appreciated :-)

[Brett Nortje]

Thank you so much, Clive!

There are two possible scenarios:

1) They pay him R30 for his membership, he has Rnil CGT on this. The loan remains in the books as being payable and they repay the loan as and when they have the funds. No CGT implication on the loan.

2) 1) They pay him R30 for his membership and his loan account (in essence he writes off the balance of the loan owed to him). Will this be a CGT loss of R40,000 for the member and a R40,000 CGT gain for the cc due to the deemed disposal?

Further advice will be greatly appreciated :-)

If they pay him for membership, a service has been rendered, so there is a money trail. if they do not honor what you have on paper, then you get the money back, yes?

If you were to insist on interest, they will pay much quicker. did you write this down?

[CLIVE-TRIANGLE]

Thank you so much, Clive!

There are two possible scenarios:

1) They pay him R30 for his membership, he has Rnil CGT on this. The loan remains in the books as being payable and they repay the loan as and when they have the funds. No CGT implication on the loan.

2) 1) They pay him R30 for his membership and his loan account (in essence he writes off the balance of the loan owed to him). Will this be a CGT loss of R40,000 for the member and a R40,000 CGT gain for the cc due to the deemed disposal?

Further advice will be greatly appreciated :-)

Well I guess so, except that the CGT loss is that of the remaining member.

It depends what your goal is? Remember there is an annual exclusion so the likelihood of him running into CGT is remote. So if he were to charge full value for the loan and even R30,000 for the shares, he would still have no CGT liability.

[J7J]

Thank you, Clive. The whole reason for the transaction is that the 30% member wants out due to the cc not being viable any longer and he does not want to be involved with the business due to the probability of the business running into losses. The remaining member is his son in law, so they want him to have the best position possible, but they can't afford to really pay him something at this stage.

So my feeling is that they should follow scenario 1 (1) They pay him R30 for his membership, he has Rnil CGT on this. The loan remains in the books as being payable and they repay the loan as and when they have the funds. No CGT implication on the loan.) Would you agree that this is the best approach?

Is there any risk that he will be seen as a member due to this loan (even if he has no membership any longer) if the cc gets liquidated because they can't pay their debt?

[CLIVE-TRIANGLE]

So my feeling is that they should follow scenario 1 (1) They pay him R30 for his membership, he has Rnil CGT on this. The loan remains in the books as being payable and they repay the loan as and when they have the funds. No CGT implication on the loan.) Would you agree that this is the best approach?

Yip

Is there any risk that he will be seen as a member due to this loan (even if he has no membership any longer) if the cc gets liquidated because they can't pay their debt?

No, not legally anyway. The loan, being on the books of the cc, might hamper it down the line. Depending on the rest of the cc's numbers, it might be possible writing off the loan without putting the cc in a tax positive position? If there is never any real intention to repay it, and it is unsecured, then at the minimum there should be an IFRS Fair Value adjustment (but it will still reflect in the notes as x - y).

[J7J]

Thank you very much for all your advice.

I have spoken to them and their feeling is that the loan should be written off in the books of the cc, as there is currently no intention to repay the loan, as they can't afford it. But they want the best outcome regardless.

So if they follow scenario 2 (2)They pay him R30 for his membership and his loan account (in essence he writes off the balance of the loan owed to him). Will this be a CGT loss of R40,000 for the member and a R40,000 CGT gain for the cc due to the deemed disposal?) => I have 2 issues that I am unsure of here: a) Why would the R40,000 CGT loss be the remaining member's and not the exiting member's? b) And then, do you agree with the R40,000 CGT gain for the cc due to the deemed disposal?

[CLIVE-TRIANGLE]

Normally, one member would sell his shares and loan to the other member. They normally, but not necessarily, go together.

Now that the issues are better known, the resigning member could sell his shares for R30 (no CGIT) and his R40k loan to the remaining member for R30k. So R30k less annual exclusion of R30k = nil so no CGIT. The transaction would be between members with no impact on the cc, other than shifting members contributions and loan to the remaining member.

That's just another option. I know there remaining member would probably never pay the resigning member, but that can be dealt with by a clause that member A will pay member B whenever the cc pays member A.

[J7J]

Now that the issues are better known, the resigning member could sell his shares for R30 (no CGIT) and his R40k loan to the remaining member for R30k. So R30k less annual exclusion of R30k = nil so no CGIT. The transaction would be between members with no impact on the cc, other than shifting members contributions and loan to the remaining member. .

If he sells his R40k loan to the remaining member for R30k, wouldn't the resigning member make a R10k capital loss (R40k - R30k)? And then would the remaining member make a R10k capital gain because the loan was sold at less than fair value?

How did you arrive at a R30k capital gain - and who does this capital gain belong to?

[CLIVE-TRIANGLE]

If he sells his R40k loan to the remaining member for R30k, wouldn't the resigning member make a R10k capital loss (R40k - R30k)?

yes correct.

If the loan cannot be repaid in a reasonable time then it is impaired, probably right down to zero, which is what it's fair value is.

How did you arrive at a R30k capital gain - and who does this capital gain belong to?

Ignore it, but what I meant was if it is impaired to nil. But you would put SARS' head in a terminal spin.