transfer of property by dividend in specie

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An in specie dividend is the transfer of an asset instead of making a cash payment. The aforementioned cash values in terms of the Seventh Schedule have been extended for application to another tax apart from normal tax, being Value-Added Tax.60 This article argues that the specific guidance on the valuation of services or right of use of assets in terms of the Seventh Schedule could also be extended to the application in the context of dividends tax. When cash isnt readily available, thats when a distribution in specie often comes into play. The amended "dividend" definition removed reference to all elements of profits and reserves and regards any amount transferred or applied as a dividend, unless those dividends come from contributed tax capital.26 The new definition of "dividend" is also not concerned with the presence or absence of profits.27 Consequently, directors are able to pay out whatever they believed fit - provided the company met the solvency and liquidity requirements,28 without being concerned with the presence or absence of profits. WebCG45315 - No gain/no loss transfers in groups: dividends in kind The transfer of the asset may be effected by the subsidiary company declaring a dividend in kind also known as a 71 S 15(5) of the Canadian Income Tax Act R.S.C. The same applies to the structuring of a distribution in a manner other than a dividend in order to avoid dividends tax, which in essence would be a distribution in lieu of cash or an asset that would have been taxed. of 1985. Ambiguity could also arise by the fact that the ITA refers to other terms which could also be conceived as dividends in specie, being "distribution in specie,"5or "asset in specie".6Current guidance issued by the SARS in respect of dividends tax only distinguishes between financial instruments, movable or immovable property, and deemed dividends in respect of low-interest loans to certain shareholders.7 No current guidance is provided in respect of the granting of services or right of use of assets as dividends in specie. The South African tax legislation has gone through many phases of tax reform; one of which started after the year 2000, which saw the adaptation of the tax system to conform to international tax law.61Specifically, with regard to the taxing of distributions to shareholders, the STC regime was replaced with the dividends tax regime in order to align it with international practices.62 Investigating the tax implications of distributions by entities to shareholders in the context of international practices could provide guidance whether the granting of services or the right of use of assets could constitute dividends for ITA purposes. A shareholder is defined as a person who is entitled to a dividend. In Cactus Investments (Pty) Ltd v CIR,32the court held that in order to comprise an "amount", rights of a noncapital nature must be "capable of being valued in money". 29 De Koker & Williams supra n 14 at para 25.7I. of 1985under section 89 is defined as a dividend other than certain exempt dividends that are listed in subsection (a) and (b) of the definition of a taxable dividend.68 This provides no insight into what would constitute a dividend other than the common law cash dividend. Enter to open, tab to navigate, enter to select.

54 Para 6(2) of the Seventh Schedule to the Income Tax Act 58 of 1962. 31 WHLategan v CIR 2 SATC 16 (1926) 19. 7 SARS Comprehensive guide to dividends tax (Issue 2) (2017) 62. Taxable dividend distributions made by companies to shareholders are included in the taxable income of the shareholder in terms of the Canadian Income Tax Act reads as follows: "In computing the income of a taxpayer for a taxation year, there shall be included the total of the following amounts: (i) the total of all amounts, other than eligible dividends and amounts described in paragraph (c), (d) or (e), received by the taxpayer in the taxation year from corporations resident in Canada as, on account of, in lieu of payment of or in satisfaction of, taxable dividends."67. 64 Kohla Dividend income from personal use of business assets 1974 American Bar Association Journal 1431. 2023 Thomson Reuters. 88 S 21A(1) of the Australian Income Tax Assessment Act of 1936. Simply-Docs uses cookies to ensure that you get the best experience on our website. The use of "any amount" in the dividend definition furthermore supports a broad interpretation in respect of which this article submits that the granting of services or right of use of assets should also be included within this broad interpretation. Or declare a dividend of x per share without mentioning the 20 Goldswain "Hanged by a comma, groping in the dark and holy cows: Fingerprinting the judicial aids used in the interpretation of fiscal statutes" 2012 Southern African Business Review 37. SARS describes "property" as anything that can be disposed of and turned into money.46 "A right" would include both personal rights (enforceable against a specific person).47 Granting of services is not submitted as an "asset" as such services are immediately consumed or utilised by the shareholder resulting in the personal rights obtained being exercised immediately. In considering the context, the same broad meaning ascribed to the word "amount" must be given in the context of the definition of "dividend" in section 1(1) of the ItA.35The granting of a service or the right of use of an asset would therefore constitute an "amount". WebTransfer of shares as dividend/distribution The key matter to consider is that the decision to transfer the asset creates a debt of the company to shareholders.

39 Jutastat RS 23 Dividend (2018) Tax: Juta's Practice Collection Online (accessed 2019-04-26). A dividend in specie is similar, but the difference is that the assets have been previously declared as cash.

6 S 10B(2)(d) and S 64EA. A company must only make distributions out of profits available for that purpose. Weve written previously about distribution in specie, so take a look at our guide to find out more about it and the link with overdrawn directors loan accounts in particular. 81 UK Income Tax (Trading and Other Income) Act of 2005. 59 S 64E(3) of the Income Tax Act 58 of 1962. of 1985. It usually involves the transfer of an asset such as property, an investment or equipment.

Hudson Weir are an established firm of Insolvency Practitioners who specialise in business recovery and corporate financial solutions. Section 64FA (1) (b) of the Act provides a dividends tax exemption if the beneficial owner of a distribution of an asset in specie forms part of the same group of companies. Webnabuckeye.org. 58 Para 10(1) of the Seventh Schedule to the Income Tax Act 58 of 1962. WebTechnical factsheet: dividend in specie and distribution in specie in private companies Often the question is asked about how you determine that a dividend is declared or The main sections in the Australian Income Tax Assessment Act of 1936 that contain provisions for the taxing of dividends are section 44 for resident shareholders and section 128B for withholding tax on non-resident shareholders. The amended "dividend" is defined in section 1(1) of the ITA as: for the benefit of or on behalf of any person and in respect of any share in that company, by way of a distribution made by the company.30. The provisions to determine the cash equivalent taxable benefit for the private use of residential accommodation stipulates that the value placed on the taxable benefit will be the "rental value" less any consideration paid by the employee to the employer.56The "rental value" is determined by way of a formula; however, if the full ownership of the property is not vested in the employer, the "rental value" is the lower of the value per the formula or the expenditure incurred by the employer.

92 Legal Information Institute (undated) Title 26 of the Internal Revenue code and federal regulations available at https://www.law.cornell.edu/uscode/text/26 (accessed 2018-06-30). Taxing provisions for dividends and company distributions are contained in sections 382 to 401 of the Income Tax (Trading and Other Income) Act of 2005.79Within these sections, reference is made to dividends and other distributions. 75 Mitchell 2012 Collins Barrow: Tax Alert 5. One way of doing this is via a straight forward asset purchase agreement. The granting of services or the right of use of assets could thus constitute dividends in specie. Furthermore, the context of the provisions contained in the Income Tax Act considered in this article, does not indicate findings contrary to the broad interpretation of the meaning of "dividend" and " in specie". 80 Her Majesty's Revenue and Customs (HMRC) 2015 Corporation tax, income tax and capital gains tax: Company distributions available at https://www.gov.uk/government/publications/corporation-tax-income-tax-and-capital-gains-tax-company-distributions/corporation-tax-income-tax-and-capital-gains-tax-company-distributions (accessed 2018-06-30). 1Introduction A dividend in specie has been described as any d ividend other than in the The law around both matters of distribution in specie and dividend in specie are set out in the Companies Act 2006.

In C:SARS v Brummeria Renaissance (Pty) Ltd & Others,34it was held that it did not follow that if a receipt or accrual cannot be turned into money, it had no monetary value. 19 De Koker & Williams supra n 14 at para 25.1D. p. roperty. 27 National Treasury supra n 24 at 24. To understand this, the best place to start is by comparing it to a distribution in specie. Can a dividend in specie be a transaction at an undervalue or a fraud on creditors under the Insolvency Act? The word "amount" is used in the definition of "gross income" as defined in section 1 of the ITA and has been judicially considered in a number of cases and held to include not only money but the value of every form of property earned by the taxpayer, whether corporeal or incorporeal, which had a money value.31If the term "amount" is given a broad meaning incorporeal property such as rights would also be included. They can specify if they want to take a portion of the asset in-kind and another portion in cash. Due to consecutive increases in the applicable tax rates of natural persons, the incentive for electing a distribution that does not constitute a dividend also increases. See our, The business is solvent but not profitable, Directors want to retire or stop managing the business, Directors want to close down the business while distributing money and assets in a tax-efficient manner, How long (up to 12 months) the business needs to pay its debts, A list of current property, assets and liabilities, The dividend was previously declared in cash but is now realised via asset transfers, This has been agreed as preferable or more efficient than selling assets to raise cash. 33 CIR v People's Stores (Walvis Bay) (Pty) Ltd 52 SATC 9. The value of the motor vehicle benefit conferred on the shareholder is determined based on the provisions for taxable amounts to be included from employment. An in-specie transfer is like a gifting of asset where the ownership of the shares is transferred to another entity in whole, without selling the underlying investment. We are currently considering ways to achieve a group re-organisation. follow afterwards. Dividends: how should a dividend in specie be documented? In the USA, distributions of other property, such as services and the private use of corporate assets, referred to as constructive dividends, have received much attention from the IRS, yet no official provisions or policies for determining the value of the deemed dividends exist.100 Dividends include the distribution of property and the US courts have held that property includes the provision of services and the use of corporate-owned property. I assume that the amount of the distribution will be treated as the net book value of the business and assets, ie the book value of the business and assets less the liabilities to be assumed by the parent - is this correct? WebThe distribution of an asset to a shareholder, being the distribution of the loan account, is treated as a dividend in specie. This shareholders ordinary resolution contains the wording that may be used to approve the type of distribution where a company declares a specified cash amount to be satisfied by the transfer of non-cash assets of equivalent value. Dividends are typically paid in cash but can also be made in kind with non-cash assets (such as shares in another company, or property or other physical assets) through what is commonly referred to as a dividend-in-specie. Whilst it is possible to make Cookies "Property" is defined under section 317(a) as "money, securities, and any other property except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock)".93 The value attributable to a dividend of property is the amount of money received if received in cash, otherwise the fair market value if other property is [received.94, The Code of Federal Regulations (CFR) is a codification of general and permanent rules and regulations published in the Federal Register by agencies of the federal government of the USA. 2. Thus, a potential structure exists for avoiding tax. 76 Mitchell supra n 75 at 5. Personal information.

102 C:SARS v NWK Ltd (2011) 73 SATC 55.

60 S 10(13) of the Value-Added Tax Act 89 of 1991. The first three countries and South Africa are part of the Commonwealth, with the Commonwealth countries' legislation having common influences as these countries were once territories of the British Empire.63 Notwithstanding the fact that the USA does not form part of the Commonwealth countries, the inclusion of the USA as a country for investigation is considered as it provides practical guidance from a government that has paid attention to the granting of services and the right of use of company assets to shareholders.64 Canada, the UK, Australia and the USA were also four of the five countries included in the international comparison by National Treasury in revising the base for taxable distributions.65 It is recognised that transferring insights in respect of taxes between different countries could be a problematic endeavour as tax systems could differ significantly between countries. It is normal practice that the property or land is transferred first between pension schemes, with any remaining cash to . Furthermore, the Seventh Schedule also contains specific guidance on the valuation of services granted as fringe benefits. The disposal of the asset by the subsidiary will be covered by TCGA92/S171, provided, for dividends on or after 1 April 2000, the asset remains within the UK tax net (CG45301). 28 Edward Nathan Sonnenbergs Inc. "What constitutes a dividend" 2008 Integritax. Thanks (0) Share this content. The company, on the other hand, experiences a negative impact on its net value either due to costs associated with performing the services or allowing the beneficial owner to use company assets, or in the form of lost income (opportunity costs). of 1985. For more information about a MVL or dividend in specie settlement, please contact us. Shareholder & Partnership Agreements, Board Minutes and more. Cash-poor but asset-rich companies may consider a payouts during a MVL via dividend in specie, meaning that shareholders receive assets instead of cash. In terms of section 44(1), dividends are paid to shareholders by the company from profits derived from any source.83 Section 44(1A) states that for purposes of the Income Tax Assessment Act of 1936, in terms of dividends paid out of an amount. You should also check the company's articles to ensure that an in specie dividend is permitted. The broad interpretation of the meaning of "dividend" and "in specie" in the ITA supports the granting of services or the right of use of assets as constituting dividends in specie. Guidance from the UK would indicate that in the South African context, any expenses paid for on behalf of a person in respect of a share would be interpreted as being included in the ambit of a dividend. The value of the private or domestic use of such asset shall be either the rental amount paid by the employer if such asset is leased by the employer, or the value shall be determined as 15% per annum on the lesser of the cost or market value of the asset at the date of commencement of the period of use.54 If the asset is owned by the company before distribution, the value for dividends tax purposes could be calculated as 15% per annum of the market value at the date of distribution apportioned for the months used within a year of assessment. 69 S 15(1.2) of the Canadian Income Tax Act R.S.C. As shareholders could opt for the granting of services or the right of use of assets if not classified as a dividend, these methods could be applied to avoid dividends taxes and could also result in a non-recoupment of deductions claimed by the declaring company. 2 3 Guidance based on the Seventh Schedule. Given that the intention is for the parent to assume the liabilities of the business and asets to be distributed I have a number of queries as follows. Where the employer acquired the vehicle subject to a maintenance plan, the percentage is reduced to 3.25%. Canadian legislation includes provisions for tax benefits received by shareholders, which specifically include provisions for taxing the use of a motor vehicle for private purposes by a shareholder. Granting the right of use of assets could result in an "asset" if the shareholder obtains right of use for a defined future period. This provides no guidance in terms of what would be considered property distributed for purposes of dividends tax. It usually involves the transfer of an asset such as property, an investment or equipment. These types of distributions would also not fall within the definition of a taxable benefit as defined in the Seventh Schedule to the ITA if no employment relationship exists. 42 Collins Dictionary (2018). In the case of a distribution of an allowance asset, tax deductions or capital allowances for the company in respect of the asset distributed will be recouped in terms of section 8(4)(k) of the ITA on distribution of the asset as a dividend in specie. This transfer is called a dividend in kind or a dividend in specie. An alternative to a distribution of cash dividend is a distribution of a particular asset (or assets) to shareholders. 55 Para 7(1) of the Seventh Schedule to the Income Tax Act 58 of 1962. This factsheet looks at company law, reporting and tax issues to provide a broad overview of issues in relation to dividends and distributions in specie. In short, you may be aware that a distribution in specie is the transfer of assets as they are. A dividend in specie is similar, but the difference is that the assets have been previously declared as cash. The document is in open format. WebWeve made it even easier for you to recommend Curtis Banks to your clients. Guidance obtained from the Canadian courts on how to determine the fair market value of the benefit indicates that it would be the fair market value rent for that benefit. Dividends are typically paid in cash but can also be made in kind with non-cash assets (such as shares in another company, or property or other physical assets) through what is commonly referred to as a dividend-in-specie. Hudson Weir provides industry leading, nationwide services for its clients with the intention of easing financial pressures and providing recovery strategies for struggling businesses. 17 Natal Municipal Joint Pension Fund v Endumeni (2012) 4 SA 593 (SCA) 16. In Specie. Reviewed by James Chen. Updated Jul 1, 2019. The phrase in specie describes the transfer of an asset in its current form rather than in the equivalent amount of cash. In specie distributions are usually made when cash isnt readily available or when its simply more practical to hand over the asset rather than cash. However, if a service or the right of use of an asset is granted as a dividend in specie, the declaring company could still claim deductions without any recoupment in terms of section 8(4)(k) or section 8(4)(a) on subsequent granting to the shareholder if no asset was distributed or amounts recouped.

Now well take a look at the significance of a dividend in specie process in the context of a solvent company going through a liquidation procedure. You have rejected additional cookies. Key facts.

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