The Companies Amendment Act, 1999 (Act No. 17 of 1999), was promulgated on 30 April 1999. This Act inter alia repeals sections 83 and 84 of the Companies Act, 1973 (Act No. 61 of 1973), which provides for the reduction of the capital of a company. Furthermore, sections 85 to 90 of the Companies Act, 1973, are substituted to make provision for the acquisition by a company of its own shares, the acquisition by a subsidiary of shares in its holding company and to generally regulate payments to shareholders. The amendments to the Companies Act, 1973, as introduced by the Companies Amendment Act, 1999, will come into operation on 30 June 1999.
The impact of these proposed changes on the provisions of the Income Tax Act, 1962, the Stamp Duties Act, 1968, and the other Acts administered by the Commissioner for SARS, was evaluated. It is apparent that a number of changes to the relevant legislation will be required in order to regulate and clarify the tax consequences of the buy-back of shares and the payments of amounts to shareholders.
The acquisition by a company of its own shares in terms of the new section 85 of the Companies Act, 1973, will result in the cancellation of the shares and a reduction of the company's reserves (distributable or non-distributable). It will, therefore, have an impact on the amount available for distribution by the company and, consequentially, the collection of STC.
The view is held that a buy-back of shares will give rise to a dividend where the profits available for distribution, as determined for purposes of the definition of "dividend" in the Income Tax Act, are reduced as a result of the buy-back of the shares and the company will, therefore, be liable for STC. Furthermore, a shareholder company from which the shares are so acquired, will be entitled to claim a credit for STC purposes in respect of the portion of the selling price of the shares which constitutes the dividend, if it complies with the other provisions relating to STC in the Income Tax Act. In order to place this beyond doubt, it is the intention to recommend to the Minister of Finance that the definition of "dividend" in the Income Tax Act be amended with effect from 30 June 1999, to ensure that a partial reduction or redemption of the capital of a company, as contemplated in that definition, also includes a buy-back of shares in terms of the new section 85 of the Companies Act.
The view is held that where a person holds shares as trading stock and such shares are sold to the issuer company in terms of a buy-back transaction, the full consideration for the disposal of the shares should be included in the income of the trader for normal tax purposes. In order to give effect to this, it is the intention to recommend to the Minister that the Income Tax Act be amended, with effect from 30 June 1999, to provide that the portion of the consideration received by the trader which constitutes a dividend not be exempt from normal tax. The same principle will also apply in respect of other forms of capital reduction. The provisions of section 9B will, however, remain applicable where all the requirements of that section have been complied with.
As far as stamp duty, marketable securities tax and uncertificated securities tax are concerned, the view is held that where a company buys back its own shares and there is no intention to avoid the payment of stamp duty in terms of a scheme as contemplated in section 23(10) of the Stamp Duties Act, 1968, this transaction should not be subject to such duties or tax. It is, however, the intention to recommend to the Minister that the provisions of section 23(10) of the Stamp Duties Act, be extended to ensure that stamp duty will be imposed where a buy-back of shares forms part of a scheme as contemplated in that section with effect from 30 June 1999.
Where the provisions of section 85 and 90 of the Companies Act are applied as part of a scheme for the avoidance of the payment of STC, normal tax or stamp duty, the Commissioner will not hesitate to apply the anti-avoidance provisions of the Income Tax Act and the other relevant Acts, or propose that further amendments be effected to the legislation, in order to address the abuse.
In order to give effect to the abovementioned amendments, the Minister of Finance will be requested to table the appropriate legislation later this year.
ISSUED BY THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE
PRETORIA