In a very general sense, the contributed tax capital of a company (in relation to a particular class of shares) is the aggregate of all capital that has been contributed to a company by shareholders in that class, less the capital that has been returned to them.
Where a company distribution reduces the contributed tax capital, it is considered a return of capital, and where there is no reduction it is a dividend for tax purposes.
The definition of “contributed tax capital” contains a proviso to the effect that no shareholder (in relation to a particular class of shares) may receive contributed tax capital in excess of that shareholder’s proportion of shares held in the class. In other words, there is a principle of proportionality that applies.
In the Taxation Laws Amendment Bill 2021, read with the National Treasury’s explanatory memorandum, it was indicated that Government intended to amend and clarify this proviso.
The purported reason was that some companies were exploiting the provision by allocating contributed tax capital to certain shareholders on the basis of a share premium contribution, which is not allocated to all shareholders.
The amendment that was ultimately captured in the Taxation Laws Amendment Act 20 of 2021 did, however, cause concern.
Specifically, a further proviso was introduced to the effect that there can be no transfer of contributed tax capital unless all shareholders in the class participate in the transfer in the same manner and are allocated an amount of contributed tax capital on a proportional basis.
Seemingly it would then not be possible to effect a transfer of contributed tax capital (and thus a return of capital) if just some shareholders participate and not all.
The amendments are supposed to come into effect on 1 January 2023.
However, in the 2022 Budget Speech, it has now been indicated that the National Treasury will further consider the impact of the proposed amendments and review the matter during the 2022 legislative cycle. It therefore appears that the proposed amendments will not necessarily come into effect on 1 January 2023 in their current form.
