22.5 POINT 4 – PROVISO
Basically the proviso to the definition says that a shareholder cannot receive a distribution in a different proportion to the shares they hold for a particular class of shares. If they receive a higher amount to the proportion of the shares they hold then this will be classified as a dividend. It’s best to explain this by way of example.
EXAMPLE 1
Let us say a company has a R100 worth of shares and the share premium is now R9,900 making the total share capital R10,000.
One of the shareholders, a 50% shareholder gets R6,000 as a distribution. As the shareholder is only a 50% shareholder they would only be entitled to R5,000 of the share capital and share premium, therefore R1,000 of the repayment is a dividend. Later on the same company wishes to pay R6,000 to B who is now the only shareholder. As the CTC is R5000 one can only reduce the CTC by R5000, therefore R1000 is a dividend. This is for the purposes of illustration only as there are various company issues here in that a company cannot have no share capital. The above situation could be that the share premium could be repaid and the shares could be left intact.
EXAMPLE 2
A shareholder owns 10,000 ordinary shares in a company which amounts to 20% of the company. These shares have a cost of R100,000. The company buys back the shares for R450,000. What would the journal entry be for this transaction? The balance on the CTC account before the transaction is R1 million rand.
As only 20% of the shareholding is to be paid back only R200,000 will be a capital reduction reducing the CTC balance of R1million to R800,000. The balance of the distribution R250,000 will be a dividend.
This is in line with the proviso of the definition.
CAPITALISATION ISSUE
Where shares are transferred from accumulated reserves or any other reserves this is called a capitalisation issue. This is not a dividend and therefore is not taxable as a dividend. The shares are received by the shareholder for nothing. Capitalisation issues do not form part of CTC. Any payment above the value of the transfer is a dividend