COMPANIES
1988. Contributed tax capital and par value shares
September 2011 - Issue 145
Since 1 January 2011 the Income Tax Act No. 58 of 1962 (the Act) has a new definition for "dividend" as well as a definition for the newly introduced concomitant term, "contributed tax capital" (CTC).
Of course, these definitions are of importance in respect of determining a company's liability for Secondary Tax on Companies (STC) since STC is levied on the net amount of any dividend declared by a company. When the new Dividends Tax replaces STC, announced to take effect on 1 April 2012, these terms will be of equal importance.
Essentially, these definitions introduced a new way of determining whether a distribution or payment by a company is a dividend for purposes of the Act.
In simplistic terms, a dividend is now defined as any distribution by a company that does not reduce the CTC of that company, save for a few exceptions. That is, if CTC is reduced, the distribution is not a dividend.
Generally, the CTC of a company is the sum of all consideration the company has received for the issue of shares. It is calculated by first determining an opening CTC balance as at 1 January 2011, which balance is equal to the sum of the stated capital (non-par value shares) and/or share capital and share premium (par value shares) relating to the shares of that company immediately before 1 January 2011. Any part of that amount that would have constituted a dividend (on the old definition) had it been distributed before1 January 2011 is excluded.
In order to calculate the current CTC of a company any consideration received by or accrued to that company for the issue of shares after 1 January 2011 should be added. Also, the amount must be reduced by any amount transferred to shareholders after 1 January 2011 that the directors of the company have determined to reduce CTC.
The directors of a company may determine whether an amount transferred to shareholders will constitute a reduction of CTC or, put differently, will be paid from CTC and thus not constitute a dividend.
It is important to note that the definition of CTC requires one to calculate the CTC relating to each class of shares separately. Increases or decreases in CTC relating to one class should not be attributed to any other class. Also, where there is a distribution to shareholders of a particular class, each shareholder of that class is deemed to receive such part of that distribution as relates to his shareholding in the particular class.
The duty on a company is therefore firstly to determine its CTC as at 1 January 2011 and secondly to keep record of any addition to or reduction of CTC after that date. More specifically, a CTC record needs to be kept for each class of shares.
The Companies Act, 2008, came into force on 1 May 2011. One of the more significant changes that it has brought to companies law is the doing away with par value shares. However, in terms of Regulation 31(5) to the Companies Act, par value shares already in issue as at 1 May 2011 may remain in issue, and further par value shares authorised before that date may also still be issued.
Accordingly the concept of par value shares will remain relevant for a considerable time to come. For each class of par and non-par value shares a separate CTC record needs to be maintained.
Cliffe Dekker Hofmeyr
