Monthly Archives: May 2016

Financial assistance and the Companies Act

One of the more significant changes that the “new” Companies Act, 71 of 2008, brought about was that a company may now provide financial assistance to prospective shareholders to subscribe for shares in that company. In other words, it may lend persons money to enable them to subscribe for shares in the lender (although other forms of financial assistance is also contemplated – see below). Previously, in terms of section 38 of the now repealed Companies Act, 61 of 1973, this was not allowed.

In terms of section 44 of the “new” Companies Act, financial assistance by a company would include extending a loan, guarantee or the providing of security to enable a person to obtain funding for purposes of acquiring shares in that company. Section 44 seeks to regularise such instances of financial assistance however, and this would extend beyond the mere granting of a loan to a would-be shareholder. The wide definition of “financial assistance” makes it clear that the section covers various scenarios and also specifically where financial assistance by a company is provided to anyone not only for the purpose of enabling him or her to subscribe for shares in that company, but also if the assistance is to enable shares to be acquired in a related company.

The purpose of the provision is quite clearly to protect existing shareholders. For example: if a company were to lend money to a prospective shareholder who is subsequently unable to repay the assisting company, that company would have effectively diluted the shareholding interests of the existing shareholders (who would have paid cash for their shares), whilst the new shareholder who is unable to repay the company still has an interest left in the company (and indirectly therefore to the cash subscription proceeds of the other shareholders).

Notwithstanding the potential negative effect of allowing shares to be subscribed for in a company on loan account, it is foreseeable that such financial assistance may be required from time to time for genuine commercial purposes and transactions that would otherwise not have been feasible. B-BBEE transactions are an excellent example of this.

For a company to give financial assistance to a would-be shareholder, the directors of the company must be satisfied that the financial assistance is fair and reasonable to the company, and further that the company will be solvent and liquid thereafter. They must also ensure that this is not in contravention of the company’s Memorandum of Incorporation. If in breach of any of these conditions, the directors may potentially be held personally liable. Typically, the shareholders of the company must also approve thereof by way of a special resolution.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

How South African dividends are taxed

Dividends received by a South African taxpayer are generally exempt from income tax. The major exemption though being dividends received from so-called REITs (these being some of the major property owing companies listed on the JSE (such as for example Redefine Properties Ltd). Dividends received from REITs are not exempt from income tax, and will be subject to income tax in the hands of the recipient taxpayer. (Refer section 10(1)(k)(i) of the Income Tax Act, 58 of 1962.)

However, for ‘normal’ non-REIT dividends, merely since dividends are income tax exempt does not mean that dividends are not subject to any tax whatsoever. Dividends are still subject to the dividends tax, which is a tax levied at 15% of dividends received, and are taxed in the hands of the recipient taxpayer. The tax also operates as a withholding tax; in other words the tax is withheld by the company declaring the dividend and paid over by it directly to SARS on the taxpayer’s behalf. For example, imagine that a company declares a dividend of R100 to a shareholder. Of this amount, only R85 is paid over to the shareholder, with the remaining R15 being paid to SARS on the taxpayer’s behalf.

There are however numerous classes of persons which are exempt from the dividends tax, in which case dividends tax need not be withheld by the dividend declaring company if dividends are declared to these identified persons. The most commonly used of these exemptions is that used by South African companies: they are exempt from dividends tax. In other words, in the example above, if a South African company is the shareholder receiving a dividend, no dividends tax would need to be withheld and paid over to SARS. In addition, the dividend should not be subject to income tax either. The prerequisite for the exemption from dividends tax specifically to apply though is that the exempt entity, such as a company-type shareholder, must inform the investee (or dividend declaring) company that it is such an exempt entity. In other words, the assumption exists that a shareholder is not exempt from the dividends tax, until the declaring company is informed otherwise.

 As a result, it may be beneficial for non-exempt entities (such as trusts or individuals) to hold their share portfolios through a wholly-owned company. Beside the added benefits attaching themselves to using a privately owned company through which to hold a shares in companies (such as securing these from attachment by the individual/trust’s current or contingent creditors, or to ensure more efficient management of a portfolio of investments) a company also offers the opportunity to receive returns on investments in the form of dividends more tax efficiently. South African dividends received by a South African company will most likely not be subject to either income tax or dividends tax. Dividends tax considerations are of course not the only factor to take into consideration before such a decision is made, and professional advice should best be obtained from a professional to ensure that correct structuring decisions are made.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Passive income and SARS

Have you ever investigated passive income opportunities to earn extra money? Did you consider the effect that earning additional income might have on your current income tax liability? If your income increases, whether from a passive income source or otherwise, SARS will soon come to the party to claim its share of your profits. Do you know what the effect of earning passive income might be on your present tax situation? If not, do read the rest of this article.

What is passive income?

Passive income is money you earn now which you didn’t have to work for now. However, you did work for it when you set up your source of passive income in the past.

If you set up your passive income source correctly, it will continue to generate income with either a minimum or no presence from you as the business owner. That’s what makes passive income so attractive: there’s no direct link between the number of hours you work and/or must be present in the business, and the amount of money you can make.

Provisional tax considerations

A taxpayer will not be required to submit provisional tax returns if his/her only source of income is remuneration from their employer and the employer deducts PAYE on a monthly basis from such remuneration.

PAYE can only be deducted by an employer from remuneration paid to its employees. If you earn passive income which is not subject to PAYE, you will have to submit provisional tax returns. Provisional tax is calculated on the estimated taxable income for a specific tax year. Please consult your tax adviser for advice regarding any potential provisional tax obligations.

Income tax considerations

As with any type of business income, passive income will be subject to income tax. SARS will allow a taxpayer to deduct the expenses incurred in generating the passive income, provided that the expenses are tax deductible in terms of income tax legislation. A taxpayer earning passive income will thus be taxed on the resulting profit (passive income less expenses incurred to generate that passive income).

For an expense to be tax deductible against passive income, it must fulfil all the following requirements:

  • It must have been actually incurred (i.e. the expense must either have been paid already or be due and payable);
  • In the carrying on of any trade;
  • In the production of passive income (there must be a link between the expenditure and the passive income); and
  • Not be of a capital nature (i.e. the expense must not give rise to an enduring/long term benefit).

If you are not sure whether an expense will be tax deductible and/or at which amount, please consult your tax adviser for advice.

Dual-purpose expenses (i.e. expenses that were incurred both for business and private purposes at the same time) may be apportioned according to the ratio of the business-related portion to the total amount of the expense. Only the business-related portion of the total expense will be tax deductible.

The profit you earn as a result of your passive income venture will be added to your taxable income for a specific tax year. If you already earn income from another source (e.g. salary/wages), that income and the profit from passive income will be added together to determine your taxable income. Taxable income will thus increase, which might put you into a higher tax bracket with a higher tax percentage.

To avoid nasty surprises it is important to consider the income tax implications of a passive income opportunity before taking advantage of such an opportunity. Although the figures you use for the calculations will be estimates and might not be that accurate, it’s still better to do some semi-accurate calculations than no calculations at all.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Reference List:

Accessed on 3 September 2015:

Accessed on 9 September 2015: