22.4 PART 3 – REDUCTION OF CONTRIBUTED TAX CAPITAL
Section 46 of the Companies Act deals with this and there are some formalities that need to be complied with for a buyback in terms of the companies act. The directors must determine what CTC is to be transferred to shareholders; they must actually calculate the amounts. The safest thing to do when a share buyback takes place besides doing the normal company law formalities is to take care of CTC calculation and to include the details of the CTC calculation in the resolutions.
Where money is transferred to a shareholder out of share capital the CTC amount must be reduced. The repayment to the shareholder must be after 1 January 2011. The payment to the holder of the share does not have to be the registered holder. It can be the person entitled to the dividend on the share.
In regard to the repayment a formality must be involved. The directors must determine the amount of CTC to be transferred. Refer to s 46 of the companies act. The board must authorise the transfer by way of resolution.
EXAMPLE 1
Let us say a company has a share capital of R100,000 plus a share premium of R900,000 and retained income of R2 million. The directors resolve that they are going to pay an amount of R800,000 to shareholders. The CTC of this company is R1,000,000. If nothing is said the full amount of the R800,000 distributed to shareholders is a dividend and is subject to the dividend withholding tax. In this case the CTC remains the same.
Let’s say that the directors resolve that of the R800,000, R300,000 is to be paid out of share premium and R500,000 out of reserves or retained income. This means that R300,000 is a reduction of CTC and is not a dividend and R500,000 is a dividend and is subject to the dividend withholding tax.
EXAMPLE 2
The share capital of the company is R50,000 being 1000 ordinary shares of R50 each and it has a retained income of R60,000 making the total share capital and reserves R110,000.
The company decides to buy back 10% of the shares by making a payment of R25,000 to shareholders. In this example because the company has determined that they are only buying back 10% this would make a buy-back to shareholders of R5,000 which is a capital reduction and a reduction of the balance of CTC. The balance of the payment of R20,000 has to come out of retained income and is therefore a dividend.