Broadly, the intention is that a capital distribution made in the winding-up of a company will be taxed as income if: The new rule will not apply where what the shareholder receives in the winding-up is a repayment of the share capital originally subscribed for the shares, or consists only of irredeemable shares in a subsidiary of the company being wound-up. In the winding up of the company the shareholder receives the retained profits as capital on which he is subject to CGT. With the increased dividend tax rates this retention becomes more attractive. The shareholder must now calculate the capital gain or loss in respect of the part-disposal; the first step is the apportionment of the capital gains tax base cost of the share. Consider the example of an individual shareholder who subscribed for the only share issued by a company for R10, represented by R1 of share capital and R9 of contributed share premium. Taxpayers may want to consider winding-up their companies or making substantial dividend distributions ahead of 6 April as a result of these measures and the changes to the taxation of dividends. The measure will apply to distributions made in the winding-up of UK and non-UK companies on or after 6 April ; and is likely to result in a rash of liquidations before the end of the current tax year. This means that the business sells off not just any inventory it may have, but its tools of production, building and any other assets it may have. The receipt or accrual of a capital distribution gives rise to a deemed part-disposal by the shareholder for capital gains tax purposes. Tax-Free Merger When one company merges with another, both sides generally want to avoid recognizing any gain on the transaction. Only the amount that exceeds the taxpayer's basis in the stock is capital; this is taxed as a capital gain. The consultation document asks whether consideration should be given to re-introducing a rule under which the profits of close companies are apportioned to their participators and taxed as income similar rules existed until If you purchased the stock at different times, divide the dividends into short-term and long-term proportionally, based on when each block of stock was acquired. This measure does not address directly the benefit of deferring an income tax charge by accumulating profit within the company. The former target stockholders get their acquirer stock from a liquidating dividend. While there are many different types, the common thread is that in exchange for acquiring a target company's assets or stock, the acquiring company provides its stock, and sometimes cash and other property, to the target company's shareholders.
The former target company stockholders transfer their basis to their new stock, and when they sell their acquiring company stock they will use that figure to calculate their taxable gain or loss. Keep your tax records for at least seven years, to protect against the possibility of future audits. In reality, the shareholder has received a dividend of R2 and a return of a portion of the original investment. If the company pays out a distribution of R11 in anticipation of its liquidation representing R9 of share premium and R2 of retained income—everything but the share capital , the following tax implications arise: The basis in the stock is how much the taxpayer paid to obtain the stock. However, these distributions can have unforeseen capital gains tax consequences for the shareholder receiving the distribution. Often a liquidation is overseen by a receiver, or a chosen representative of the shareholders, who oversees the process to ensure that it runs smoothly and that the corporation maximizes the return from the sale of its assets. For some businesses, such as consultancies, there is very little disruption in liquidating a company and setting up another company to carry on the business. The capital gain is thus R9—R9 , or nil. The company has since accumulated R2 of retained income, giving the share a market value of R12, and is now being liquidated. The shareholder should expect the liquidation distribution to be entirely tax-free. Finance Bill includes provisions designed to prevent taxpayers converting profits generated in a company into a capital receipt in the hands of the shareholder s. Tips For complex returns, consult with a tax professional, such as a certified public accountant CPA or licensed attorney, as he can best address your individual needs. The above can be contrasted with the position where the company first distributes the R2 of retained income, and subsequently distributes the contributed share premium. In the winding up of the company the shareholder receives the retained profits as capital on which he is subject to CGT. Where a shareholder receives a capital return, for example, on a sale, or a distribution made in a winding-up, that receipt is subject to CGT. However, if the merger is for cash and stock, the target company's stockholders must recognize gain attributed to the transaction to the extent they received cash. Background When rates of capital gains tax CGT are significantly lower than rates of income tax taxpayers will always be drawn to planning that extracts profit as a capital receipt. Profits extracted from a company as dividends are taxed as income. This means that the business sells off not just any inventory it may have, but its tools of production, building and any other assets it may have. At the maximum effective capital gains tax rate for individuals, the shareholder is liable for R0,15 of tax. With the increased dividend tax rates this retention becomes more attractive. Paid after satisfying all corporate debts, the liquidating dividend is meant to provide a return on investment. The former target stockholders get their acquirer stock from a liquidating dividend. While there are many different types, the common thread is that in exchange for acquiring a target company's assets or stock, the acquiring company provides its stock, and sometimes cash and other property, to the target company's shareholders. The method of calculation may have the anomalous effect of creating taxable capital gains upon the receipt of, for example, a liquidation distribution comprising retained earnings and a portion of the originally contributed capital.
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