This was a tricky one.

The couple had been donating R100k each, every year to the trust on loan account and now owed the trust R2m.

Co-incidentally the commercial property was worth about R2m.

Over the years they had built up significant favourable loan accounts totalling about R3m in the company.

This was the structure:

And this is what we wanted:

We needed to do four things:

1. Separate the property from the trading company and get it into the investment company.
2. Shift the trading company into the trust as a subsidiary of the investment company.
3. Shift the debt owed to the trust into the investment company.
4. Eliminate the debt owed to the clients by the trading company.

All without tax if possible. Here’s how:

1. The trading company is VAT registered.
   1. We form an investment company and register it for VAT.
   2. The trading company signs a lease (of the property) with the investment company commencing on the date of the transaction.
   3. The investment company buys the business of leasing the property as an income earning going concern. This is a zero rated VAT transaction.
   4. The business is worth zero because it consists of the property minus the amounts that our clients had lent to the trading company to pay for rates etc. when the company could not afford to. No CGT.
   5. The Investment company would now owe our clients the R2m portion of the trading company’s debt which went with the property in the sale of the business.
2. We form a new trading company owned by the investment company.
   1. We run down the trade in the first company writing all new contracts in the second trading company.
   2. The first company still carries the overheads with falling sales, so it’s profits fall and it shrinks, while the second company grows within the trust structure.
3. We amend the trust deed to make the investment company a beneficiary of the trust.
   1. Then we distribute the R2m debt asset to the investment company as a beneficiary.
   2. The investment company now owes our clients R2m and is owed R2m by them. It and the clients enter into an offset agreement which cancels both of those debts.
   3. An offset agreement is not a forgiveness of debt, so, no CGT.
4. When the first company profits drop to zero, it repays the R1m debt still owed to its shareholders, declares a dividend equal to its residual retained earnings and ceases trading. I couldn’t find a way around the Dividends Withholding Tax of 20%.

All of that in just one free 2 hour Zoom meeting.