Payouts from other capital funds

IS A PAYOUT FROM A COMPANY’S OTHER CAPITAL FUNDS TAXABLE INCOME?

Income from a payout of other capital funds, if it accrues to an individual, is taxable income that forms part of other income under Section 8 of the Income Tax Act.

Under Section 8(2) of the Income Tax Act, the taxpayer can reduce this income by an expense equal to the monetary contribution demonstrably paid into the other capital funds.

It follows from this procedure that if an individual can prove that they paid a monetary contribution into the other capital funds, this income will not be taxed.

When paying out capital funds, care must be taken to ensure that, after the payout, the company does not:

• get into a situation that would lead to its insolvency,
• become insolvent,
• fall into crisis.

A company is in crisis if it is insolvent or at risk of insolvency.

A company is insolvent if it is over-indebted or unable to pay its debts.

A person is over-indebted if they have more than one creditor and the value of their liabilities exceeds the value of their assets (they have negative equity).

A company is at risk of insolvency if the ratio of its equity to its liabilities is less than 8 to 100 (value of equity/value of liabilities).

Do you need help documenting the payout of other capital funds correctly, so that you avoid unnecessary taxation, or tax evasion should you fail to declare this income? Don’t hesitate to contact us – we will be happy to help.