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Is a dividend paid to a trust subject to the 15% dividends tax?

29 May 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: A trust owns 100% of the shares in a company. The company declares a dividend to the trust. Is the trust liable to pay dividends tax or does the dividend tax become a liability only when a natural person gets the dividend paid out of the trust?

One of my clients went to a seminar presented by a trust specialist. He is advising his attendees to pay a minimal salary from the company (they are the directors) and the rest to be paid out as a dividend to the trust. He is specifically telling them that there will be no dividend tax liability this way.

My view is firstly the directors are the ones rendering a service and should be paid accordingly for these. They should be taxed on their actual remuneration. Any dividends that are declared to another company would not be paying dividends tax, however any dividends declared to a natural person the 15% dividend tax will apply. I would assume the trust would pay the 15% dividend tax as well?

A: We agree with your view.  

The trust is liable to pay the dividends tax at 15% and the company will not be entitled to pay the dividend without withholding the dividends tax.  We accept that the trust beneficiaries do not have a vested right to the dividend.  That would however only make a difference if a beneficiary with a vested right qualifies for an exemption from the dividends tax or for a lower rate of tax.  

What was overlooked by the client (possibly the presenter of the seminar) was section 10(1)(k)(i)(ii) of the Income Tax Act.  It specifically provides that a dividend in respect of services rendered does not qualify for the exemption from normal tax.  The trust will therefore receive the dividend as taxable income.  

As indicated earlier, we agree that proviso (ii) to paragraph (c) of the definition of gross income in section 1(1) of the Income Tax Act would apply – in other words the director will have to declare the amounts paid to the trust as his or her gross income.  

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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