The Minister of Finance announced in his budget speech on 22 February 2012 that the new Dividends Tax, replacing the former Secondary Tax on Companies, would be at a rate of 15% - not the 10% advised previously. He also announced an effective one-third increase in all capital gains tax rates.
The Dividends Tax increase was to be effective from 1 April 2012, but capital gains tax was to increase from 1 March 2012 for most taxpayers – 5 working days hence.
This was an inter vivos trust housing an investment company. This company in turn owned fixed property and a listed investment portfolio. All of these growth assets would in all likelihood be realised within 10 years at significant capital gains. The company had substantial existing reserves. As the object of the trust was to support the family beneficiaries, all reserves would eventually be distributed.
We contacted the client pro-actively, called a meeting of trustees, and advised the trust to collapse the investment company into the trust, by selling all of its property and equity assets to the trust. As a result the company resolved to dispose of all of its assets to the trust – all within the 5 working days available to take action. We further advised the company to distribute all of its reserves – including the gains on sale of the assets - to its shareholder, the trust. The effective date of the dividend was to be 30 March 2012.
The tax effects of the above were calculated urgently to allow for appropriate provisional tax to be paid on 29 February, and for the secondary tax on the dividend to be paid in April.
By taking the above urgent actions on our advice, it is estimated that this client will over time save in excess of R11m which equates to approximately 60% of the capital gains and dividends taxes which would have been payable had we not intervened.
This client is a trading company with substantial reserves built up over many successful years.
When we contacted this client we ascertained that a substantial amount – approximately R50m was likely to be withdrawn from the company mainly to develop a central warehouse. The effect of this was that taxes on such distribution would increase exponentially as a result of the 2012 budget changes.
We advised the client to make a large distribution as at 30 March 2012 – the direct effect of our pro-active intervention was that tax of R8,25m which would have been payable was reduced by 40% to R5m.