[Question] Dividend Reinvestment

[filunt1]

We are in the process of buying out a majority shareholder and would like to know if we can legally declare a dividend inclusive of tax with an undetermined payment date after we have bought the shares from the majority shareholder. So the % split would still be the same, tax implication would be the same but the majority shareholders payment would remain in the company.

This allows for the existing shareholders to reinvest the dividend back into the company by buying shares. Only once the payment date is determined can the money and tax be released / paid.

[mark@suitegum.co.za]

The dividend declared on a date is apportioned to the shareholders on that date.

Dividend = R100
Tax = R20
R80 can be reinvested in the company by the shareholders, in their individual loan accounts.

You can agree a price with the exiting shareholders for the shares, with deferred payment terms.
Transfer ownership of the shares.
Then declare a dividend, pay the taxes, and each shareholder uses his dividend to pay the sellers at the deferred date agreed.

{Not sure why the sellers would agree to this}

WATCH OUT FOR TAX IMPLICATIONS

[filunt1]

From what I understand the tax implication is the dividends should ideally be paid within the companies tax year, otherwise the individuals will gain personal tax benefits under the new loan account legislation.

[filunt1]

I am currently in discussion regarding this question with one of the possible new investors, he is certain that this is not legal but he coming from a UK base which does have different accounting laws.

So according to SA tax law is the following Legal
1. Declare a dividend with a deferred date.
2. Proportional split is made according to the shareholding at the time of the declaration.
Dividend = R100
Tax = R20
R40 can be reinvested in the company by the shareholders, in their individual loan accounts
R60 majority shareholder stays in the company

3. You can agree a price with the exiting shareholders for the shares, with deferred payment terms.
4. Transfer ownership of the shares.
5. Then declare a dividend, pay the taxes, and each shareholder uses his dividend to pay the sellers at the deferred date agreed.

[mark@suitegum.co.za]

I would not venture an opinion on tax laws as I am not qualified. And those laws have probably changed half a dozen times since we started this conversation.

You don't need to declare a dividend in any particular financial year. I have clients who sit on an ever-growing distributable reserve for years. Then last year when the dividends tax changed from 15% to 20%, they declared a 100% dividend, paid tax at 15%, and returned the money to the company by way of loan accounts.

Practically:

Why would the seller of the shares give money to the buyer of the shares to buy his shares?
Why would the majority shareholder just leave his dividend in the company for someone else to benefit, without being compensated for the sacrifice? After all, he invested in the company initially so that he would benefit from dividends later. There is no other reason to own shares.

[filunt1]

I would not venture an opinion on tax laws as I am not qualified. And those laws have probably changed half a dozen times since we started this conversation.

You don't need to declare a dividend in any particular financial year. I have clients who sit on an ever-growing distributable reserve for years. Then last year when the dividends tax changed from 15% to 20%, they declared a 100% dividend, paid tax at 15%, and returned the money to the company by way of loan accounts.

Practically:

Why would the seller of the shares give money to the buyer of the shares to buy his shares?
Why would the majority shareholder just leave his dividend in the company for someone else to benefit, without being compensated for the sacrifice? After all, he invested in the company initially so that he would benefit from dividends later. There is no other reason to own shares.

The seller is retiring and wanted the company to continue with the existing shareholders, he was the original owner and didn't want to see it fall apart. The seller was also selling an additional asset which we are buying so in a round about way he is receiving his dividend but the company is paying the tax.