Dividends Tax: An Overview

From 1 April 2012, Secondary Tax on Companies (“STC”) will be replaced by Dividends Tax, and regulated by sections 64D to 64N of the Income Tax Act 1962 (“the Act”). The South African Revenue Service has stated the reason for the change from STC to Dividends Tax as follows:  “The name Secondary Tax on Companies created the impression that South Africa’s corporate tax rate was higher than that of our competition internationally, making us a less attractive destination for investment. The change to Dividends Tax, therefore, aligns us with international standards and best practice where the recipient of the dividend is liable to the tax relating to the dividend and not the company paying it”. 

What is a Dividend?

A “dividend” means any amount transferred or applied by a company for the benefit of any shareholder by virtue of any share held in the company. It includes amounts transferred as consideration for a share buy back and excludes the following:

• Reduction of the company’s share capital or share premium

• Issue of capitalisation shares

• Buy back of shares by a listed company

• Buy back of participatory interest by a foreign collective investment scheme

 What is Dividends Tax?

Dividends Tax is a tax imposed on shareholders at a proposed rate of 15% on receipt of dividends, and is classified as a withholding tax. This means that the company or regulated intermediary (eg, a unit trust fund manager) paying the dividend will withhold the Dividends Tax and pay it over to SARS on behalf of the beneficial owner of the dividend.

STC is a tax imposed on companies (at a rate of 10%) on the declaration of dividends.

In the Budget Speech 2012, announced on Wednesday 22 February, SARS has given the reason below for the proposed increased rate:

“For equity reasons it is proposed that the dividend withholding tax come into effect at 15 per cent – five percentage points higher than the previous secondary tax on companies rate. Income from capital can be derived as interest income, dividends or capital gains, all of which should be taxed equitably.  High-income individuals tend to receive a larger portion of their income in the form of dividends and capital gains. The higher rate will also help to mitigate some of the revenue losses when switching from the secondary tax on companies to the new tax.”

Effectively, Dividends Tax is imposed on dividends declared and paid by resident companies, as well as by non-resident companies in respect of shares listed on the JSE. Dividends are tax exempt if the beneficial owner of the dividend is a South African company, retirement fund or other exempt person.

What are the differences between STC and Dividends Tax?

 Note the table below contains the general rules and does not cover all exceptions and exemptions unless specifically stated

Description STC Dividends Tax
Trigger for liability Declaration of a dividend Payment of the dividend
Person liable Company declaring the dividend Recipient(beneficial owner)Must be withheld by the company distributing the dividend, or where relevant, the withholding agentExceptions: Dividends in specie – liability remains with company
Rate 10% (previously 12,5%) 15%
Exemptions Certain companies were exempt based on the tax status of the company declaring the dividend (for example Section 10 exempt entities, fixed property companies, certain gold miners, dividend payments between group companies) Exemptions from Dividends Tax depend on the nature or status of the recipient (beneficial owner).In order to qualify for the exemption, the recipient is required to notify the company distributing the dividend or the withholding agent, of such exempt status. Examples of exempt entities that would qualify:

  • local companies;
  • any of the three tiers of government;
  • approved public benefit organisations (section 30(3) of the Act);
  • mining rehabilitation trusts (section 37A of the Act);
  • persons referred to in section 10(1)(cA) of the Act; pension, provident, preservation, retirement annuity, beneficiary and benefit funds (section 10(1)(d) of the Act);
  • persons referred to in section 10(1)(t) of the Act (CSIR, SANRAL etc);
  • shareholders in registered micro businesses  where the  dividend does not exceed R200,000; and
  • non-resident beneficial owners of dividends received from SA listed non-resident companies
Reduced rates for foreign residents  There were no reduced rates under STC The relevant Double Taxation Agreement (DTA) between South Africa and the foreign resident’s country must provide for a reduced rate (usually where foreign beneficial owner holds 10% to 25% of the share capital of the South African company declaring the dividend)In order to qualify, the foreign resident must to declare his/her status as such
Calculation STC was calculated as 10% of dividends paid, less dividends received in any given dividend cycle Calculation is based on the dividend paid to the recipient, without reference to a dividend cycleFor 5 year period, Dividends Tax can be reduced with any available STC credit which is made up from two possible sources:

  • unused STC credit of the company brought forward from the final dividend cycle under the STC system, and
  •  any new pro rata portion of any STC credit received by the company  (less any dividends paid).
Payment of Liability Payment was made by the company declaring the dividend (and hence liable for the tax).Payment had to be made on or before the end of the month following the month in which the dividend cycle ends Payment will be withheld from the dividend payment by a withholding agent (either the distributing company or a regulated intermediary) who will pay the tax to SARS (on or before the end of the month following the month in which the dividend was paid to the beneficial owner).Where a dividend in specie is distributed, a scenario similar to that under STC will apply as the company distributing the dividend retains the liability for the tax as well as the duty to pay it to SARS.
Dual listed companies Did not apply under STC rules Any foreign withholding taxes paid on dividends may be deducted from Dividends Tax due.

 Conclusion

 The change from STC to Dividends Tax will affect the returns derived from your portfolio of investments, depending on the extent to which your portfolio holds shares that pay dividends. Remember that if you hold unit trusts, Dividends Tax will be levied against you despite the fact that you are not a shareholder in the ordinary sense.

From 1 April 2012, you will receive dividends net of dividends tax, and you will receive a tax certificate (2013 onwards) that reflects the distributions that you received and the dividends tax that has been withheld prior to distribution.

 Please note that this is a very high level summary of a Dividends Tax article that the South African Revenue Services has posted on their website, and does not cover the formal definition of a dividend or the detailed administrative processes and procedures. For further reading please see www.sars.gov.za .

 

Gill Nathan

CA(SA) H Dip Tax, H Dip International Tax

Gill Nathan is a CA specialised in international tax. She has a BCompt, BCompt Hons, post grad certificate in accounting, CA(SA), post grad certificates in VAT, estates and mining tax, HDip Tax (cum laude) and HDip International tax. She has spent 4 years in the international tax dept at SARS, 1  year at KPMG and 5 years running her own tax practice.

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