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					Ta x Alert
Current law
• The return of ‘pure/untainted’ share capital and premium; • Any pre - 1 October 2001 capital profits; • Any pre-31 March 1993 revenue reserves; and • Any profits arising before that company/close corporation became a resident. The identification of pre-31 March 1993 revenue reserves entails a careful analysis of all the company’s/close corporation’s reserves. As far as pre-31 March 1993 profits are concerned, a determination will need to be made of whether any portion of the current reserves are made up of these profits. With regards to the question of whether any of these profits have been subsequently distributed, SARS accepts a last-in-first out approach. The position regarding capital reserves is more complicated.

chartered accountants & business advisers

November 2008

Secondary Tax on Companies/Close Corporations

Under current legislation, certain types of profits are exempt from secondary ta x on companies (STC). In terms of section 64B(5)(c) of the Income Ta x Act (the Act), the following amounts will be exempt when distributed in the course of or in anticipation of liquidation, winding-up or deregistration of a company/ close corporation (liquidation distribution):

• With regards to capital assets disposed of on or after 1 October 2001, the capital profit which would qualify for the STC exemption is calculated by deducting the market value of the assets as at 1 October 2001 from: - the proceeds realised upon disposal of the assets; and/or - the market value of the assets distributed to shareholders/members as a liquidation distribution in specie. • It is important to note that a company/close corporation will only be able to qualify for this exemption if the assets were valued for CGT purposes before 30 September 2004 and the required forms completed and submitted (where required by the Act). • Finally, this exemption would only apply if certain steps are taken within 18 months from the date of the liquidation distribution.

Amendment
With effect from 1 January 2009, no portion of a liquidation distribution will be exempt from STC, aside from: • The return of ‘pure/untainted’ share capital and premium; and •` Any realised and unrealised profits of a company before it became a South African resident company.

• Any capital reserves that arose from the disposal of capital assets before 1 October 2001 will qualify for the STC exemption.

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Implications of the amendment
The distribution of pre-31 March 1993, revenue reserves and pre-1 October 2001 capital reserves as a liquidation distribution on or after 1 January 2009 will result in an STC liability in the hands of the company/close corporation. Example: • A company acquired an asset for R20 million in 1995. • As at 1 October 2001, this capital asset was valued at R40 million. • The company has accumulated revenue reserves of R10 million as at 31 December 2008. All revenue reserves were generated after 31 March 1993. • The directors of the company wish to deregister the company. • The market value of the asset as at 31 December 2008 is R50 million. • The following can be concluded:

STC cost if liquidation distribution made on 31 Dec 08 Revenue reser ves subject to STC Capital reser ves subject to STC Market value of the asset at date of distribution Less: Market value of asset as at 1 Oct 2001 Less: CGT liability (see N1 below) Cost of asset Total reserves subject to STC STC at 10/110
N1: CGT liabilit y

STC cost if liquidation distribution made on 1 Jan 09 10 000 000 28 600 000 50 000 000 n/a 1 400 000 20 000 000 38 600 000 3 509 091

10 000 000 8 600 000 50 000 000 40 000 000 1 400 000 n/a 18 600 000 1 690 909

Market value of the asset at date of distribution Less: Market value of the asset as at 1 Oct 2001 Capital profit subject to CGT CGT at effective rate - 14% (28% x 50%)

50 000 000 40 000 000 10 000 000 1 400 000

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Recommended course of action
Therefore, for those companies/close corporations considering restructuring their groups in the immediate future, it is advisable that steps to streamline their groups are taken during the current calendar year, as the amendment to the STC exemption with effect from 1 January 2009 results in a significant increase in the STC cost of liquidation distributions. The directors should prepare a resolution distributing the following assets and reserves as a liquidation distribution: • All capital assets acquired before 1 October 2001 and in respect of which a valuation was performed as at 1 October 2001; • All pre-1 October 2001 capital reserves; and • All pre-31 March 1993 revenue reserves. This resolution should be dated and signed before 1 January 2009. This distribution must be disclosed in the IT56 form and must be submitted to SARS by the end of the month following the month in which the distribution is made. Furthermore, STC should also be paid in respect of the post-1 October 2001 capital reserves arising on the distribution of the capital assets referred to above. It is important to note that where there are reserves still remaining in the company/close corporation upon distribution of the aforementioned assets and reserves, STC is payable at the rate of 10% and not the fraction of 10/110. Thereafter, the following steps must be taken within 18 months (or such longer period as the Commissioner may allow) from the date of the liquidation distribution: • In the case of a liquidation or winding-up: - that company/close corporation must lodge a resolution authorising the voluntary liquidation or winding-up of that company/close corporation, for registration; and - it must have disposed of all assets and settled all liabilities (other than assets required to satisfy any reasonably anticipated liabilities to any sphere of government of any country and costs of administration relating to the liquidation or winding-up); • In the case of a deregistration that company/close corporation must submit a written statement signed by each of its directors confirming that the company has ceased to carry on business and has no assets or liabilities. • That company/close corporation must submit a copy of the resolution (in the case of liquidation/winding-up) or the written statement (in the case of deregistration) to the Commissioner; and • All the returns or information required to be submitted or furnished to the Commissioner in terms of any Act administered by the Commissioner must be submitted or furnished or arrangements must be made with the Commissioner for the submission of any outstanding returns or furnishing of information. Upon distribution of all remaining revenue and capital reserves, STC is once again payable by the end of the month following the month in which the final liquidation distribution is made. In this case STC would be calculated using the fraction of 10/110.

Disclaimer: This material is intended to provide general information only. It should in no way be utilised as a substitute for professional advice. PKF does not take responsibility for any loss or damage suf fered by any person as a result of the reliance upon information contained herein. PKF (South Africa) Inc. is a member of PKF International Limited, an association of legally independent member firms.

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posted:12/15/2009
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Description: Tax Alert