By Heinrich Louw (DLA Cliffe Dekker Hofmeyr Tax Alert)
During the transition phase from Secondary Tax on Companies (STC) to Dividends Tax at the beginning of April 2012 there had been some uncertainty as to whether particular dividends would be subject to STC or Dividends Tax with reference to the time of declaration or payment.
The uncertainty was partly caused by the co-existence of the STC provisions and the Dividends Tax provisions in the Income Tax Act, No 58 of 1962 (Act) and the perceived overlap of the application of some of these provisions, specifically with reference to terminology and timing.
However, s148 of the Taxation Laws Amendment Act, No 7 of 2012 made it quite clear that Dividends Tax would only apply in respect of dividends declared and paid on or after 1 April 2012.
The STC provisions would apply to dividends in respect of any other scenario, such as where a dividend was declared before 1 April 2012 but would only accrue or become payable thereafter.
In Binding Private Ruling 121, this particular question also arose. The applicant was a resident company, listed on the JSE, and the co-applicant was a non-resident company that had a secondary listing on the JSE. They both formed part of a global group. It is also understood that the shares of the applicant and co-applicant carried the same rights and that if a dividend was to be declared in respect of the applicant's shares, a matching dividend would be declared in respect of the co-applicant's shares.
The fact giving rise to the uncertainty in this ruling was that the board of directors of the applicant and the co-applicant had recommended, at the time of disclosure of the group's financial results (before 1 April 2012), that a dividend should be paid to the shareholders of the applicant and the co-applicant after 1 April 2012. This recommendation was subject to approval at the annual general meeting to be held after 1 April 2012.
The question was whether such a recommendation fell within the ambit of 'declare' in s64B of the Act, and accordingly, whether there was a declaration of a dividend before 1 April 2012.
If there was such a 'declaration' before 1 April 2012, the STC provisions would have been applicable. It should be noted that the STC provisions generally only apply to residents. In other words, if the STC provisions were to apply, they would not apply to the co-applicant because it was a non-resident.
The term 'declared' in s64B(1) of the Act is defined as "in relation to any dividend (including a dividend in specie), means the approval of the payment of distribution thereof by the directors of the company or by some other person with comparable authority or, in the case of the liquidation of a company, by the liquidator thereof".
SARS ruled that the dividend would not constitute a dividend 'declared' before 1 April 2012 within the meaning of the definition of 'declared' in s64B(1) of the Act.
Accordingly, where the dividend would be declared and paid after 1 April 2012, it would be subject to dividends tax.
The ruling makes it clear that the entire dividend to be paid by the applicant would be subject to dividends tax because it was a resident company, and it fell within paragraph (a) of the definition of 'dividend' in s64D of the Act.
In respect of the co-applicant, only the dividend relating to the co-applicant's shares that are listed on the JSE would be subject to dividends tax because dividends paid by non-resident companies are only dividends to the extent they relate to locally listed shares. That is, they fall within paragraph (b) of the definition of 'dividend' in s64D of the Act.
Accordingly, it was ruled that the applicant and co-applicant would have to withhold dividends tax to the extent that exemptions or reductions in terms of tax treaties do not apply.