Buying back shares from shareholders: dividends tax liability
19 November 2015
Posted by: Author: Daniel Robb
Author: Daniel Robb (Shepstone
& Wylie Attorneys)
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.
1 of the Income Tax Act No. 58 of 1962 (the "Act") defines a
"dividend" as inter alia:
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.
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 applied...as consideration for the acquisition of any share
in that company..."
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.
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.