CAPITAL PROFIT LIQUIDATIONS I am what I am National Treasury

Current Law From the company’s perspective: Distribution of capital profits is exempt from STC. From the shareholder’s perspective: If a distribution subject to STC takes place, the dividend received is tax-free. CGT applies on the surrender of share: However, the capital profits reduce the base cost of the share. This reduction currently has a minimal impact because the base cost in the share refers to the post-October 2001 value; and The gain applies only when the base cost is reduced to a negative amount.

I Example of current law Liquidating Company’s capital profit R100 Shareholder’s historical base cost R20 Shareholder’s October 2001 value R90 Result under current law (15%/10%) CGT on R10 Result under proposed law (12.5%) STC on R10 Liquidating Company Distribution to shareholder I -Tax free Shareholder surrenders shares -CGT payable if SA resident -Tax free if foreign person

Remedy STC applies only to post-October 2001 capital profits and matches CGT. Therefore all capital profits prior to October 2001 will be “grand-fathered”. Applies only to the appreciation on the sale of assets occurring after October 2001.

Bankruptcy Reorganisations- Problem Exaggerated No impact under current law because all capital profits are shifted from the share-holder. As a practical matter, it is doubtful if a STC distribution will otherwise take place: Due to losses in the company. Little or no proceeds to distribute to the shareholders.