SCENARIO 1: THE BUSINESS IS SOLD OUT OF THE CC:
Both are registered VAT vendors and assuming the going concern concept applies and the Agreement of Sale contains the necessary clauses to effect this, the transaction will be zero rated as regards VAT.
CAPITAL GAINS TAX:
The capital gain is represented by the proceeds on disposal (R2.4 bar) less the base cost.
The base cost will include the cost of acquisition and the cost of improving the asset. As no valuation of the business was done in October 2001, the time apportionment method will be used to calculate the base cost. For the purposes of this exercise, I have assumed the following: ((R2.4 bar less R40k)/ 17years) = R138 k less R40k = R98K estimated base cost October 2001 with October 2001 being the date CGT came into effect. Note the actual calculation is more complex and this example is for illustrative purposes only.
Capital gain then estimated at: R2 302 000
80% of this amount will be included in the taxable income of the CC @ R1 841 600.
This in turn will be subject to company tax at 28% (Note you may find some additional small relief if the CC qualifies for SBC tax rates but, for the purposes of a comparison between scenario 1 and scenario 2, I have used 28%).
Expected company tax payable: R515 648
Any distribution of the resultant amount received (for purposes of the exercise estimated at R2.4 bar less R516k = R1 884 352) will attract dividend tax at 15%.
Estimated dividend tax payable: R283 000
SCENARIO 2: THE MEMBERS INTEREST IN THE CC IS SOLD:
The transaction represents the sale of a financial instrument and is therefore an exempt supply. Accordingly, no VAT is payable.
CAPITAL GAINS TAX IMPLICATIONS:
Each member will have a separate CGT calculation.
The capital gain will be the Proceeds on disposal (R2.4 bar/ 2 members = R1.2 bar) less the base cost.
The base cost will be the original cost of acquiring the members interest (R40k/ 2 members) = R20K.
An additional exclusion amount for Member 1 i.t.o. para 57 of the 8th Schedule up to an amount of R1.8 bar will only apply where a person who has reached age 55 disposes of an ENTIRE direct interest of at least 10% of the CC.
There are also 3 other requirements for member 1 to qualify for this exclusion:
CGT calculation for Member 1 based on this assumption:
R1.2 bar less R20k = R1 180 000 less exempt amount R1 180 000 = Zero taxable Capital Gain
CGT calculation for Member 2:
R1.2bar less R20k = R1 180 000 less R40k (annual exclusion) = R1 140 000
R1 140 000 at inclusion rate of 40% = R456 000
This amount would be included in the 2018 personal tax return and be subject to tax at the taxpayer’s marginal tax rate. I have assumed a marginal tax rate of 36%.
Estimated CGT liability for Member 2 will be R164k
CONCLUSION AND RECOMMENDATIONS:
Given the assumptions used above, there is a significant tax saving should the members sell the members interest as opposed to selling the business out of the CC and trying to retain the members interest.
However, there would be a disadvantage for the Purchaser should they opt to purchase the members interest in the CC as opposed to buying the business out of the CC: The Purchaser will assume the CC’s underlying CGT and dividends tax liability when they sell the business down the line.