Contributed tax capital is defined in section 1 of the Income Tax Act 58 of 1962 (Income Tax Act) and is a key concept in differentiating between dividend distributions and capital distributions (also returns of capital) for tax purposes.
Essentially, and without considering some of the more nuanced rules, the contributed tax capital of a company, in relation to a particular class of shares, is the aggregate of all capital that has been paid or contributed to the company by the holders of that class of shares (as shareholders and not as creditors), less so much capital that has been returned to the holders of that class of shares.
Where a distribution reduces the contributed tax capital of a company, it would generally be considered a return of capital, and where it does not reduce the contributed tax capital, it would generally be considered a dividend. Where the amount is a dividend, it would in principle be subject to dividends tax
(unless specifically exempt, as in the case where the beneficial holder is a South African resident company).
The definition of contributed tax capital contains an imported proviso, which effectively provides that a distribution to any particular shareholder in respect of a class of shares cannot reduce a companys contributed tax capital in respect of that class of shares by any percentage exceeding the percentage of shares that the shareholder holds in respect of that class of shares.
In the Budget it was mentioned that some companies are allocating special share premiums to specific shareholders, as opposed to all shareholders in that class. While it appears that the Income Tax Act is clear on the principle, it is proposed that amendments be introduced to confirm that shareholders of a particular class must share equally in reductions of contributed tax capital in the case of capital distributions.
Contributed tax capital is defined in section 1 of the Income Tax Act 58 of 1962 (Income Tax Act) and is a key concept in differentiating between dividend distributions and capital distributions (also returns of capital) for tax purposes.