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Buying back shares from shareholders: dividends tax liability

19 November 2015   (1 Comments)
Posted by: Author: Daniel Robb
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Author: Daniel Robb (Shepstone & Wylie Attorneys)

A look at when liability to pay dividends tax will arise in the buying back of shares from shareholders

Many issues arise when a company enters into an agreement to buy-back shares from its shareholders. If a company enters into an agreement with a particular shareholder to buy-back a certain number of ordinary shares, the shares will be returned and cancelled on the effective date of the agreement, but the payment for the buy-back will be made in instalments over several years. This raises the issue of when liability to pay dividends tax will arise.

Section 1 of the Income Tax Act No. 58 of 1962 (the "Act") defines a "dividend" as inter alia:

"Any amount transferred or applied by a company that is a resident for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or consideration for the acquisition of any share in that company..."

The payment in respect of a share buy-back therefore constitutes a dividend as defined by the Act. Section 64E(2) of the Act provides inter alia that where a dividend does not consist of a dividend in specie (dividends paid out in the form of assets), and the company declaring the dividend is not a listed company, then the dividend is deemed to be paid on the date on which it is actually paid, or the date on which the dividend becomes due and payable, whichever comes first. In order to ascertain which date is the earlier, the meaning of "payable" needs to be considered. Phillip Haupt in Notes on South African Income Tax (2013) submits that the phrase "becomes payable" is the date on which the "actual payment is supposed to be made" rather than the date on which the obligation on the company to pay the dividend arises.

De Koker et al in Silke on South African Income Tax make the distinction between the term "paid" and the term "payable", and describe the term "payable" as meaning "the day upon which payment is required to be made". The authors go on to say that the date on which the payment is actually made will not necessarily be the date on which the company incurs the obligation to pay the dividend to the shareholder, nor will it necessarily be the date on which the right of the shareholder to receive the dividend actually accrues.

The South African Revenue Service ("SARS"), in its Comprehensive Guide to Dividends Tax 2015, agrees with De Koker et al’s view.  SARS states that:

"An amount may be due under a contract (dies cedit) but not payable (dies venit). An amount will only be payable when the time for payment arrives. For an amount to be ‘due and payable’ the amount must not only be owing, but a person must have the right to claim payment of it."

It would stand to reason then, that the obligation on the company to buy-back the shares arises on the effective date of the agreement. However, the dividend is not payable on that date. The liability for dividends tax only arises on the day on which each instalment payment of the dividend is actually paid, or when each instalment of the dividend payment becomes due and payable, whichever comes first. The result is therefore quite fair in that a shareholder will not find himself in a situation where he has a dividends tax liability that is greater than the amount which he has actually received, or which he has the right to claim for from the company. In terms of s64E(1) of the Act, dividends are generally taxed at 15 per cent.

This article first appeared on the November/December 2015 edition on Tax Talk. 


Madiele S. Mpuru says...
Posted 29 December 2015
During the process of buying back the shares from the shareholder,will the dividend be paid on a pro rata basis.BEE shares have been bought back or consolidated without the shareholders consent


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