Liquidating dividends and tax treatment

58 of 1962 (the Act) (such as returns of share capital) are automatically characterised as "capital distributions" under the Eighth Schedule to the Act.

The receipt or accrual of a capital distribution gives rise to a deemed part-disposal by the shareholder for capital gains tax purposes.

A person's holding period begins the day after he acquires stock in a corporation and ends the day after he receives payment, or a final liquidation distribution, for the stock.

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The shareholder should expect the liquidation distribution to be entirely tax-free.

However, the calculation mechanism of the part-disposal rules includes the R2 dividend in the predisposal market value of the share, resulting in "lost" base cost and a taxable capital gain where no capital gain has actually been made.

When a corporation liquidates its assets in part or in entirety, the corporation may issue liquidating distributions, also known as liquidating dividends, to its stockholders.

A corporation may render noncash liquidating distributions, cash liquidating dividends or both.

The above can be contrasted with the position where the company first distributes the R2 of retained income, and subsequently distributes the contributed share premium.

In this case, the shareholder receives a tax-exempt dividend, and the market value of the share falls to R10.

The Internal Revenue Service requires a recipient of a cash liquidating distribution to record the amount he receives on Line 8 of Form 1099-DIV.

For the IRS to view a cash liquidating distribution as taxable to its recipient, the amount received must exceed the taxpayer's basis in the corporation's stock.

The shareholder must calculate a capital gain or loss on the part-disposal by apportioning the base cost of the share according to the ratio of the market values of both the capital distribution and the share, and treating the capital distribution as the proceeds on the part-disposal.

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