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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 112
o
Where the company sells an asset to the shareholder for less than its market value (e.g. an asset wroth $200 is
sold to the shareholder for $100) – the shareholder receives $100
o
Where a shareholder is released from a debt owed to the company (secon CD 5(2)
)
IS THE TRANSFER OF VALUE CAUSED BY A SHAREHOLDING RELATIONSHIP?
CD 6
When is a transfer caused by a shareholding relaonship?
(1)
A
transfer of company value
from a company to a person (the
recipient
) is caused by a shareholding in the company if—
(a)
the recipient at any relevant me—
(i)
holds shares in the company; or
(ii)
is associated with a
shareholder; and
(b)
the company makes the transfer because of that shareholding of the relevant shareholder.
The transfer of value must have been related to a relaonship between the company and a shareholder
o
There are many other relaonships a person can have with a company – employee, third-party contracng
enty etc.
o
The transfer must have been caused by virtue of the recipient’s capacity as a shareholder
Example:
o
A shareholder receives a discount of 20% of the retail price of a fridge sold by the company
But it is clearly established that other criteria are met for that discount (e.g. a certain volume of
purchases from the company entles you to a 20% discount anyway)
The fact that you are a shareholder does not maer – you are geng the transfer of value through
normal customer terms in spite of the fact that you are a shareholder
Therefore, the transfer is not caused by virtue of the shareholding relaonship
DO ANY EXCLUSIONS APPLY? – RETURNS OF CAPITAL
When a shareholder puts money into a company, they are usually subscribing for shares and share capital
o
The company will hopefully then generate a lot of income and capital profits, then pay the profits out as
dividends
o
However, occasionally, the company will have too much capital and wants to return to its shareholders the
money they originally put in
When returning share capital, it should be free of tax because it was aſter-tax income that was put
into the company, and this is just giving that money back
It would be bad for someone to put money into a company, and for it to be paid back as a dividend –
this is turning capital into income
o
Therefore, when a shareholder gets back its original subscribed capital, they should get it back tax-free
A company’s balance sheet consists of equity and net assets:
o
Equity includes:
Capital put in by shareholders (available subscribed capital)
Liabilies
Capital profits (untaxed retained earnings)
Retained earnings (aſter-tax retained earnings)
o
Assets include:
Cash
Non-cash
o
A simpler way to think of this is to match the assets with liabilies and just have net assets on one side, and
then shareholder funds on the other side:
Equity will include ASC, capital profits and retained earnings
Net assets will include cash and non-cash
o
The side that maers is equity for the purposes of returns of capital
You are trying to work out what share capital was put in to determine what you can give back tax-free
The important transacons to look at are share repurchases (also known as share buybacks)
o
The overall scheme of the Act include any proceeds passing from the company to a shareholder as a dividend,
and then has a number of exclusions to that general rule
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