LOOK OUT DIVIDENDS

Planning on Paying Dividends Soon?

Do you want to pay dividends or from your company or make distributions

from your close corporation in the near future?

Both The Companies Act, 2008 and The Close Corporations Act, 1984 stipulates

that the entity must satisfy the liquidity and solvency tests immediately after

making the proposed distribution. Directors and members can be held liable for any

payments made contrary to the above requirements of being liquid and

solvent before and after the dividend payment.

Solvency is the term used to see if an entity’s assets fairly valued

exceed its liabilities fairly valued. The fair value of an asset or liability is

not necessarily the same value as recorded on the balance sheet at year

end. The values stipulated on the balance sheet are based on the

accounting policies adopted and used by the entity. Therefore all assets,

contingent assets, liabilities and contingent liabilities need to be valued

using fair market value to ascertain if the assets exceed its liabilities.

Post balance sheet events also need to be considered when performing

the solvency test.

Liquidity is the term used when an entity is able to pay its debts as they

become due. To perform this test one needs to do a cash flow forecast.

If your forecast shows your entity can meet its liabilities within the next 12

months then your entity is considered to be liquid.

Liquidity and solvency are also key items to consider when determining if

a company’s annual financial statements must be prepared on the going

concern basis or not.

In addition to the above requirements, it should be remembered that all

dividends paid (including distributions by members of close corporations

are subject to Dividends Tax.

Information courtesy of The Tax Shop