All amounts in the question exclude VAT, except where indicated otherwise. John Smith (a South African resident) owns 10% of the shares of Holdco (Pty) Ltd ('Holdco'). There are nine other shareholders in Holdco, who are natural persons and South African residents and who each hold 10% of the shares. No shareholder agreements are in place and no single shareholder exerts control over Holdco. Holdco has an annual turnover of R150 million and is a registered VAT vendor. Holdco in turn owns 70% of the shares in the listed company, Subco Ltd ('Subco'). The company structure has been this way since 1982 and all the information below pertains to the period after this structure was established. Both companies have financial years ending on 31 December and both are South African residents for tax purposes. John originally bought his shares in 1982 for R2 million. John has never invested further funds or incurred any further expenditure, as contemplated in paragraph 20 of the Eighth Schedule to the Income Tax Act, since acquiring the shares. John records his shareholding in Holdco using the FIFO basis, whereas Holdco records its shareholding in Subco using the weighted-average basis. John and Holdco hold their respective shares with an investment ('capital') purpose. John has elected the market value on 1 October 2001 as the valuation date value for his shareholding in Holdco. The following information pertains to transactions that took place during the financial year ended 31 December 2009. These transactions received all the necessary approvals in terms of applicable statues and the Johannesburg Securities Exchange listing requirements. In analysing these transactions you may want to refer to the following table of market values for John

Smith's shares: Table of market values
Date
Market value of John's shares in Holdco
1 October 2001
R12 000 000
20 July 2009
R15 000 000
1 August 2009
R14 600 000

Transaction 1

Holdco declared a distribution to shareholders on 20 July 2009. On 30 September 2009 each shareholder was to receive a repayment of original share premium amounting to R1 million per shareholder, payable in cash, and a motor vehicle. The motor vehicles were no longer required for use in the business. The following information relates to each motor vehicle at 20 July 2009:

Current market value
R1 500 000
Tax value
nil
Carrying amount
R780 000
Original cost price - acquired from a third party on 1 March 2004, excluding VAT
R1 300 000

This was the second time that the company had repaid share premium to its shareholders. The first was on 1 October 2004, when R5 million was repaid to the shareholders (i.e. R500 000 each). On 30 September 2009 legal ownership of the motor vehicles passed to the shareholders. The market value of each of the motor vehicles at this date was R1 200 000.

Transaction 2

On 1 August 2009, Subco acquired 10% of the shares in Holdco by acquiring 1% from each shareholder (i.e. one tenth of each shareholder's holding). Subco paid R14 600 000 for the shares on the basis of an independent valuation. Subco immediately declared half the newly acquired shares as a dividend in specie to its shareholder, Holdco. In addition, by agreement between Subco and Holdco, the remaining shares held by Subco in Holdco were cancelled.

REQUIRED (a)
Calculate the normal income tax implications of transaction 1 for - (i) Holdco (Pty) Ltd (in respect of only the distribution to John Smith); and (ii) John Smith.

(b)
Prepare the journal entries necessary to recognise transaction 1, excluding secondary tax on companies and normal tax, in the financial records of Holdco (Pty) Ltd. Ignore the effects of discounting.

(c)
Discuss the income tax implications of transaction 2 for both Holdco (Pty) Ltd and Subco Ltd in the context of the dividend definition as set out in section 1 of the Income Tax Act.

(d)
Calculate the capital gain or loss for John Smith on the sale of one tenth of his shares in Holdco (Pty) Ltd to Subco Ltd.

(e)
Discuss the capital gains tax consequences for John Smith for the year of assessment ending 29 February 2012 if he does not dispose of any more of his shares in Holdco (Pty) Ltd.

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