Act ushers in more complex record-keeping

Companies making distributions to their shareholders may have to start keeping two sets of records, and sometimes even three, to comply with changing legal obligations. “The new Companies Act is likely to result in increased complexity and additional record-keeping,” says Ernest Mazansky, director of Werksmans Tax (Pty) Ltd.

He says different sets of records may be needed to meet different legal requirements. “The treatment of the numbers may differ depending on whether they are being recorded for Companies Act purposes, tax purposes or accounting purposes.”

The reason is that the requirements of tax law, company law and the accounting rules do not always converge.

“Although an effort has been made to align tax rules with GAAP in a number of respects, in other respects there is a growing divergence between the two,” Mazansky says. “This might make it necessary to keep one set of records for financial accounting and another for tax accounting.”

By the same token, there may also be differences in how share-related corporate restructuring transactions should be recorded for tax purposes as opposed to Companies Act purposes. What might be recorded as share capital under the Companies Act may effectively be treated as reserves for STC or dividends tax purposes. “In a significant number of cases, the numbers for company law purposes and income tax purposes will not correlate, necessitating separate recording of each,” says Mazansky.

The growing complexity of corporate record-keeping is due to the imminent coming into force of the new Companies Act and recent changes in the Income Tax Act. Key changes include the new definition of “dividend” and the introduction of “contributed tax capital” as a new term replacing the expression “share capital”.

A dividend is now defined as any amount distributed by a company to its shareholders, excluding an amount which results in a reduction of contributed tax capital.

In turn, contributed tax capital is:

• a company’s share capital and stated capital immediately before 1 January 2011, plus
• any consideration received by the company after this date for the issue of shares, less
• any amount transferred by the company to shareholders.

The distinction matters because dividends will trigger secondary tax on companies (STC), which will be replaced by dividends tax in the not-too-distant future. On the other hand, distributions from contributed tax capital will only trigger capital gains tax (CGT) for the shareholder.

“But the situation does not stop there,” says Mazansky. “Even these provisions are modified in certain circumstances.”

An example is when a company has issued new shares following the acquisition of an asset in an asset-for-share exchange. “One may well find an amount being credited to share capital, but there is no corresponding increase in contributed tax capital. In other words, the amount will constitute share capital under the Companies Act without constituting contributed tax capital for income tax purposes. As a result, it is possible that the repayment of that share capital for commercial, company law and accounting purposes will be treated as a dividend for tax purposes.”

Further adding to the complexity is that for accounting purposes, the treatment of share capital might in some circumstances differ from that for company law and tax law purposes. “For example, to the extent that redeemable preference shares have been issued, the financial statements will not reflect this as share capital but rather as debt,” Mazansky says.

Such differences underline the importance of keeping separate records. Mazansky says that while this might seem burdensome, it is in a company’s interests to review its record-keeping sooner rather than later. “The problem is that if you do not attend to the detail at the time when a transaction happens, it is often difficult to reconstruct later. Chief financial officers and financial directors need to be alive to this fact and keep records updated as and when transactions arise. In this way, they can avoid difficulties later, such as in the event of a company sale or an investigation by SARS.”

(Article  supplied by Werksmans Attorneys)