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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 116
In this case the Maggio Ltd may or may not have paid dividends in the period from 2007 to
2011. If they had a regular dividend paying policy and had adhered to it then this would be a
stronger posion to argue that this was not in lieu of a dividend, than if the retained earnings
had simply been aggregated in the company and never paid out
Likewise the company’s dividend policy or pracce aſter the share cancellaon could also be
helpful to refute an inference that the cancellaon is in substuon for dividends.
Issue of shares
The second test contained in subsecon 7 looks at the issue of shares subsequent to the
relevant cancellaon. In this parcular instance the proposal is to cancel 50,000 of the
available 100,000 shares. This clearly would meet the requirements of the 15% capital
reducon bright line test. If however subsequent to this cancellaon of the company had an
issue of shares for say 40,000 new shares, then the effecve capital reducon is lower than
the 15% bright line test.
Genuine commercial reasons
Lastly, it would be helpful if Maggio Ltd can point to a genuine commercial move for
returning this capital such as the desire to improve the balance sheet rao, returning surplus
capital relang to a substanal asset disposal, improving earnings per share or any other
commercial reason supported by evidence in the marketplace of industry norms, cost of
funding, comparable market raos etc.
OTHER EXCLUSIONS
On market acquisions (
secon CD 24
) (not examined)
o
Companies listed on the stock exchange can perform on-market acquisions
o
There is no taxable dividend if the shareholder sells shares on the market and is unaware whether the sale is to
the company or to another shareholder
o
Tax consequences
The shareholder is not taxed
The company can be taxed in a special way
o
When cancelling shares, the company must cancel the ASC in the shares and to the extent to there is a taxable
dividend, it must give a debit to its ICA (
secon OB 42
)
Treasury stock (
secon CD 25
)
o
A company can repurchase and hold up to 5% of their shares as treasury stock (
secons 67A to 67C of the
Companies Act
) – note that this is a very small sum, so if a company wants to make a significant distribuon to
shareholders, they wouldn’t use treasury stock
Payments to shareholders are excluded from being a dividend – the shareholders are not taxed
However, if the company cancels the shares, it must cancel up to the ASC and must put a debit in its
ICA if it exceeds the ASC
Distribuon of capital profits upon liquidaon
o
Upon liquidaon, the capital profits of the company distributed to shareholders will not be a dividend and thus
not taxed (along with ASC) (
secon CD 44
)
However, the capital profit must not have been gained with associated persons
Formula for available capital distribuon amount:
([receipt] – [ASC per share]) x ([capital gains] + ([capital property distributed] – [cost]) – [capital
losses])
÷
([total receipts] – [total ASC])
“receipt” – the amount received by the shareholder on the liquidaon for one share
o
Example
Facts
The company issues 100,000 shares at $1 each
The statement of financial performance of the company is:
Capital
$100,000
Capital profits
$50,000
Retained earnings
$108,000 ($150,000 profit less $42,000 tax)
Cash
$258,000
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