Consequences of liquidating
When the withdrawal is a result of death, there may be other collateral income and transfer tax consequences. Contributed Property Distributed to Another Partner-§ 704(c)(1)(B) 2.
If the company pays out a distribution of R11 in anticipation of its liquidation (representing R9 of share premium and R2 of retained incomeeverything but the share capital), the following tax implications arise: The portion of the base cost attributable to the part-disposal is (R9/R12 x R10), or R7,50 the capital distribution is R9, the market value of the share is R12 (the Act provides that the market value prior to the deemed part-disposal must be used for the calculation), and the original base-cost of the share is R10.
The method of calculation may have the anomalous effect of creating taxable capital gains upon the receipt of, for example, a liquidation distribution comprising retained earnings and a portion of the originally contributed capital.
Consider the example of an individual shareholder who subscribed for the only share issued by a company for R10, represented by R1 of share capital and R9 of contributed share premium.
The distribution of profits by a company being liquidated, wound up or deregistered is considered to consist of dividends to shareholders and a return of their investment in the company.
However, these distributions can have unforeseen capital gains tax consequences for the shareholder receiving the distribution.