Liquidating dividend tax treatment
Payments received in excess of the total investment are subject to capital gains tax.
Whether the amount qualifies for short or long-term capital gains depends on the trade date – the purchase date -- of the sale.
In reality, the shareholder has received a dividend of R2 and a return of a portion of the original investment.
The shareholder should expect the liquidation distribution to be entirely tax-free.
Distributions to shareholders excluded from the definition of "dividend" in section 1 of the Income Tax Act No.
58 of 1962 (the Act) (such as returns of share capital) are automatically characterised as "capital distributions" under the Eighth Schedule to the Act.
Until or unless a shareholder recovers her total investment, the amount reported on a 1099-DIV is not considered taxable income.
This means that if the difference between the fair market value of the stock and its adjusted base – the price of the stock minus broker or commission fees – is zero, no tax is due on the amount.
Long-term capital gains apply if the holding period is at least one year and a day from the trade date.The amount reported on a 1099-DIV represents the return of a shareholder’s investment.This return can be made in more than one distribution if a shareholder purchased blocks of stock over time, as opposed to making a one-time purchase.The distribution of profits by a company being liquidated, wound up or deregistered is considered to consist of dividends to shareholders and a return of their investment in the company.However, these distributions can have unforeseen capital gains tax consequences for the shareholder receiving the distribution.
However, the calculation mechanism of the part-disposal rules includes the R2 dividend in the predisposal market value of the share, resulting in "lost" base cost and a taxable capital gain where no capital gain has actually been made.