I need advice on a matter. The spouses are getting a divorce. They own equal shares in a company. The company sold the property it owned and made a Capital Gain of R5m. The property was not the primary residence. The wife is entitled to the profit in terms of the divorce settlement agreement. The company will pay CGT on the profit and then the remaining profit has to go to the wife. How does the remaining profit get taken out of the company in a way that legally minimizes any tax burden to any / all of the parties i.e. the company, husband and wife?

I am of the view that, if the remaining profit is distributed to a director in the current tax year, then it will take the form of director's remuneration and will be considered income in terms of the definition of gross income of the Act. The director will then be taxed on it. If the profit is distributed after the end of the current tax year, then it will take the form of a dividend from retained earnings and the director will have to pay 20% dividends tax. Dividends tax will be less than Income Tax at her marginal tax rate in terms of the tax tables. The confusing issue here is that the money constitutes part of a divorce settlement and a person should not be taxed on money received in terms of a divorce settlement. The fact that the money is profits stuck in a company though, is presenting a hurdle. And the settlement agreement does not cover any tax related matters.

Should the profits rather be distributed (but not paid) to the husband and an IRP5 issued to him or distributed to him as dividends and then he pays tax on it seeing that the wife is entitled to the full profit? Then the company pays the profits out to the wife in terms of the settlement agreement and supported by a resolution by the directors that it is done this way. Or is it rather fairer to split the profits by issuing IRP5's / dividends to both and they both get taxed equally? But then the wife gets penalized on her settlement amount.

The husband wants to retain all of the shares in the company after this and use the company for other business in future. I was even thinking of leaving the profit in the company then and transferring the funds from the company to him on a loan account so he can pay her her settlement. Then that leaves him with a loan that he has to pay back to the company, or he can take a dividend later and deal with the tax.