Friday, December 05, 2008

By now, many will have heard something about contributed tax capital (CTC). A year or so hence, the concept will form part of the South African tax terrain – to the relief of tax practitioners who have had to trawl through the Income Tax Act’s (“the Act”) three-to-four page long definition of a dividend. I certainly heaved a sigh of relief when I read the Revenue Laws Amendment Bill of 2008 (“Bill”). 


The Bill defines CTC as the amount received by or accrued to a company for the issue of shares on or after the date of receipt of that sum, reduced by so much of that amount as the company has transferred on or after that date to shareholders. Essentially, then, the CTC of a company is whatever has been contributed to the company by its shareholders. 


The importance of the CTC lies in the application of:


the dividend withholding tax (DWT) provisions to be contained in Part VIII of the Act; and

some of the corporate restructuring rules contained in Part III of the Act.


The CTC will be material in determining whether or not a company distribution constitutes a dividend for purposes of the Act. It will therefore be central to the application of the DWT because it will determine which company distributions will be subject to the DWT. This is primarily because of the proposed amendment of the definition of a dividend in the Bill. 


In terms of the proposed amendment, any amount which is transferred by a company to its shareholder constitutes a dividend. However, any distribution which reduces the company’s CTC does constitute a dividend. 


The explanatory memorandum accompanying the Bill says that a company distribution will only qualify as CTC reduction – and therefore fall outside the definition of a dividend – if the distributing company has to make a written determination that the distribution constitutes a distribution of CTC. However, this is not evident from the Bill. 


In the absence of the written determination, the distribution will not reduce the company’s CTC and will potentially be liable for the distribution to be subject to the DWT. The word potentially is used deliberately here because the DWT provisions contain specific exemptions. 


One of the concerns raised with the Portfolio Committee on Finance (PCOF) during the period of comment was that:


the amended definition of a dividend would increase the administrative burden on companies because it will require them to keep a second set of books to track their CTC; and

before the amendment, South African companies could rely on company law concepts such as share premium and share capital.


The PCOF rejected the comment, and rightly so, on the basis that company law and tax law differed in their respective approaches to share capital and share premium.  Because of the difference, South African companies have always had to keep an extra set of books. More importantly, the second set of books will be fairly simple, thanks to the definition of CTC. 


Ultimately,the concept ofCTC will bring much needed simplicity to the application of the Act. No longer will tax advisors be required to decode the unnecessarily long, complicated and often confusing definition of a dividend. Any inconvenience occasioned by additional compliance issues would be a small price to pay for the simplicity introduced by the changes. 



Mogola Makola is a Director at commercial law firm Bowman Gilfillan