Selling my 100% in a CC

[eitai2001]

Hi Guys.

I need some assistance with the Tax implications of selling my 100% share in a CC.

Currently, lets say my members contribution is R100 (just an assumed figure). This amount isn't actual money I put in alone, but rather also the value of the time I spent building the CC and creating and adding to it ... time that wasn't paid by salary. I have essently created a Members Contribution as the Credit, and an Intangible Asset as a debit.

My question is this ... I am planning to sell the my share for R100 i.e. the equivalent value of my members contribution. Now, because this is the value of what I have "invested" in the entity ... is it tax exempt ... can the other company just buy the Interest for R100 and I don't have to worry about paying tax or what?

Regards

Itai

[Dave A]

So essentially you capitalised unpaid salary - which means you would have paid income tax on that salary income (if applicable).

I can't see SARS getting excited about you declaring a nil capital gain unless you did a whole bundle of such transactions.

[eitai2001]

So essentially you capitalised unpaid salary - which means you would have paid income tax on that salary income (if applicable).

I can't see SARS getting excited about you declaring a nil capital gain unless you did a whole bundle of such transactions.

I didn't pay income tax on it, should I have, I can't afford the income tax on that because I never took the cash.

I'm not making any gains on the sale of the company, I'm selling it for the value I put in ... i.e. that 300,000

[eitai2001]

So if I pay 18% on that amount (because it was 300,000 over 3 years), will sars be happy ... there is no capital appreciation on it.

[Dave A]

That changed the complexion of the question somewhat. Tough to say where to start, but this looks as good a place as any -

I'm not making any gains on the sale of the company, I'm selling it for the value I put in ... i.e. that 300,000

That would be money you took out of your pocket and paid into the company or undrawn profits from the trading of the CC?

[eitai2001]

That changed the complexion of the question somewhat. Tough to say where to start, but this looks as good a place as any -

That would be money you took out of your pocket and paid into the company or undrawn profits from the trading of the CC?

Well I didn't have cash to put in, so I did everything myself only withdrew a little money, and I believe R300k is the equivalent value of what I put in over 3 years.

I think the easiest way to structure the sale will be to sell the website itself at a profit of R300k, and being an SBC I won't pay tax because profit will be <300k as I have a 20k loss on books, and then I take the profits as Dividend and pay 10% STC and it will be exempt income for me.

[Dave A]

I think the easiest way to structure the sale will be to sell the website itself at a profit of R300k, and being an SBC I won't pay tax because profit will be <300k as I have a 20k loss on books, and then I take the profits as Dividend and pay 10% STC and it will be exempt income for me.

Sounds like a good plan.

[eitai2001]

Hi Guys.

An update with the sale of my company.
We are signing the contracts this weekend if the lawyer brings the final draft by then.

We have decided on the following transaction:
I am selling 100% of the members interest in the CC to the new owner in his personal capacity.

The proceeds from the sale are 250k.
They are taking over the business as is with all liabilities and assets at the moment.

The business itself has got a loss in the books due to the recession of the current year and a bad call on my part.

My question ... what is the tax I will pay, as I am selling my 100% interest for the proceeds ... so no transaction actually takes place in the CC aside from just changing names and stuff ... am I correct on assuming there are no tax implications for the CC itself?

For myself personally, am I correct in calculating the tax this way:

Proceeds: R 250,000
Base Cost: (R 5000) (R500 and a R4500 cell phone are what I started the CC with.)
----
Capital Gain: R245000
Less Natural Person Exclusion (R15000)
Capital Gain: R230000
25% Inclusion therefore 230,000 x 0.25 = 57500
CGT at 18% = R 10350 (18% because I did not meet the second tax bracket even with salary).

So am I correct to say I am liable to pay R10350 ... are there any taxable amounts I may have missed or calculated wrong?

Regards

Itai

[Dave A]

am I correct on assuming there are no tax implications for the CC itself?

From the cc's point of view, all that has changed is the member.

[eitai2001]

From the cc's point of view, all that has changed is the member.

Ok cool ... any idea if my CGT calc is right for myself?

[daveob]

You do know, while you're doing this whole cc members change, that any surities that you signed for the debts / accounts / bank accounts of the cc, will still be in force after you change the members ?

So, if the new owner decides to default for any reason, they WILL come knocking on your door for full settlement and it doesn't make any difference to them that you sold the cc - fact is you signed the surity and you are liable.

[Dave A]

any idea if my CGT calc is right

I'm hoping Sean or Christine will check that one over. It looks like you'd gone about calculating it the right way, but my knowledge on CGT is rusty.

[eitai2001]

You do know, while you're doing this whole cc members change, that any surities that you signed for the debts / accounts / bank accounts of the cc, will still be in force after you change the members ?

So, if the new owner decides to default for any reason, they WILL come knocking on your door for full settlement and it doesn't make any difference to them that you sold the cc - fact is you signed the surity and you are liable.

The sale of members interest contract stipulates that they indemnify me against all sureties I have signed for any defaults as of the effective date with the exception of the overdraft which is retrospective, and that THEY must make the best effort to release me from all my sureties, and if not the sureties will move to them.

In any case, the only dangerous Surety I have is the overdraft which they will sign over once I give them access to the bank account.

The suppliers, they have to sign all new dealer applications for each one in any case.

[daveob]

contract stipulates that they indemnify me against all sureties I have signed for

I'm not a legal person, but I don't think that would hold up, unless the holder of the surity co-signs the agreement accepting the transfer of the surity.

If I was your supplier, and the new owners defaulted, I would come to you for payment. I don't imagine that any other agreement that you, as the signature on the surity, has with a third party, would have any influence on the surity you signed for me ( unless I had previously accepted the transfer ). How would the supplier be able to verify the credit worthiness of the new owner without being made aware of the fact ?

As a supplier, I would hold you liable for full payment, and you in turn ( after paying me ) would have to re-claim the amount from the new owner.

Any of the legal experts on the forum have any input here ?

[eitai2001]

I'm not a legal person, but I don't think that would hold up, unless the holder of the surity co-signs the agreement accepting the transfer of the surity.

If I was your supplier, and the new owners defaulted, I would come to you for payment. I don't imagine that any other agreement that you, as the signature on the surity, has with a third party, would have any influence on the surity you signed for me ( unless I had previously accepted the transfer ). How would the supplier be able to verify the credit worthiness of the new owner without being made aware of the fact ?

As a supplier, I would hold you liable for full payment, and you in turn ( after paying me ) would have to re-claim the amount from the new owner.

Any of the legal experts on the forum have any input here ?

I think you are correct in 1 sense, but I will be able to have a successful counter claim against them, and can tie up their assets. At the same time, the suppliers are not allowed to sell to them without getting my permission first if they haven't submitted a new dealer application, and as such ... I can combat the supplier with negligence ... because otherwise any fool off the street could walk into the supplier and purchase something.

If the supplier sees they bought the interest, and the supplier knew about it ... then my surety clause will be void, as the entire supplier contract would be void due to the fact that they know it has incorrect information and I am not a member.
If they did not know, then the contract would still be in force, but then I would hit them based on their own security controls and negligence.

In terms of the bank ... that will be signed over on Saturday when we go to the bank.

But what do you legal experts have to say, I'm far from knowing I am right ... this is just my thoughts on the matter?