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Dividends tax: most Unit Trust investors will pay

06 February 2012   (0 Comments)
Posted by: SAIT Technical
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Dividends tax: most UT investors will pay
Business Report - Laura du Preez

Dividends withholding tax, a tax on any dividends paid to you, will replace secondary tax on companies (STC) on April 1. In anticipation of the change, unit trust companies are sending letters to their investors, asking them to declare if they qualify for special tax status, which will exempt them from paying dividends tax. Most people who have invested directly in unit trust funds do not have to fill in the declaration forms, because they will not qualify for special tax status.

You will be exempt from dividends tax if you have invested in unit trusts or shares through your retirement fund. However, you do not have to do anything to qualify for this exemption, because your retirement fund will apply for it on your behalf. Unit trust funds receive dividends from the shares in which they invest on your behalf, and also earn interest from cash deposits and bonds. Up until now, you have had to pay tax only on local and foreign interest and on foreign dividends, Nedgroup Investments explains on its website. From April 1, dividends earned from local shares will also become taxable once they are paid to an investor who is not exempt from dividends tax. Unit trust management companies will receive the dividends tax-free, but dividends tax will become payable once the dividends are paid out to you or they accrue to you (the company uses the dividends to buy more units).

In terms of tax legislation, unit trust companies have been appointed as withholding agents and from April 1 will have to deduct the tax owed from the dividends paid out or that accrue to you, and pay it over to the South African Revenue Service (SARS), Carla Rossouw, a tax expert at Allan Gray, explains in the company’s latest Quarterly Commentary. Rossouw says most individual investors in unit trust funds will not notice the introduction of dividends tax. This is because unit trust companies will pay the tax for you, and the dividends withholding tax will be introduced at 10 percent of any dividends paid – the same rate at which companies pay STC. As Rossouw puts it, you will not receive a smaller dividend – the tax will be deducted by the unit trust company rather than by the company that paid the dividends, but the net amount will remain similar.

Up until now, your unit trust company has sent you a tax certificate that states how much interest you earned from your investments during the tax year, and you have been required to declare this amount on your income tax return. The tax for which you are liable on interest earnings can be reduced by the annual exemption.

For the 2011/12 tax year, if you are under the age of 65, you can earn R22 800 in interest before you pay tax on interest, and if you are 65 or older, you can earn R33 000 in interest tax-free each year. In the next tax year (March 2012 to February 2013), your unit trust management company will send you a tax certificate that will state not only how much your unit trust investment earned in dividends from April 1 but also how much dividends withholding tax was deducted from these dividends and paid to SARS on your behalf. You will need to declare these amounts on your tax return, but you should not owe any tax on these amounts, because the tax would have been paid on your behalf.

The government has decided to replace STC with dividends tax because most other countries have a dividend tax on shareholders rather than a tax on dividends paid by companies. It has been difficult to explain STC to foreign investors, and the addition of STC to the company tax rate has made South Africa’s corporate tax rate appear to be uncompetitive.


Most ordinary investors in unit trust funds will not qualify for the exemption from dividends tax. However, investors who own unit trusts in the name of a company or who are not permanent residents of South Africa and own a substantial portion of a South African business may qualify for an exemption or to pay dividends tax at a lower rate. It is these investors who need to declare their status on the forms sent out by unit trust companies.

Companies are exempt from dividends withholding tax to prevent them from paying tax more than once on the same dividends when these are passed through company structures.

The dividends are taxed once they are distributed to shareholders who are not exempt. Investors who hold unit trust funds through companies will have to submit the resolution that gives the person who signs the declaration the authority to do so, Stanlib says in a letter to unit trust investors. Some of the letters that companies have sent to unit trust investors note that companies that pay turnover tax on a turnover of less than R1 million a year and that do not distribute more than R200 000 in dividends are exempt from dividends tax.

However, if these businesses hold small investments in unit trust funds, they are likely to qualify for the exemption as a company in any case. The letters also note that foreign residents may qualify for a reduced rate of dividends tax, depending on whether their country of residence has a double-taxation agreement with South Africa and the nature of that agreement.

However, Carla Rossouw, a tax expert at Allan Gray, explains in the company’s latest Quarterly Commentary that normally the non-resident investor needs to be a company and must own a minimum percentage – usually between 10 and 25 percent – of the share capital in the South African company that declares the dividend. The exemption is not for ordinary unit trust investors who qualify as not resident in South Africa.

Stanlib says in its letter that if you qualify for either an exemption from dividends tax or a lower rate of dividends tax but do not complete the declaration in time, you will be taxed at 10 percent. If you then make the declaration, you can within three years of the dividend payment ask for a refund of the tax withheld.


From April 1, dividends earned from foreign and local shares will effectively be treated in the same way for tax purposes, but your unit trust company will not withhold tax on the foreign dividends earned by your unit trust fund. Foreign dividends and interest you receive through unit trust investments, including rand-denominated funds, have been taxable for some time. However, each year individuals could use R3 700 of their total exemption on local interest income against any foreign dividends and interest earned. As a result of changes to income tax legislation last year, this provision will fall away from April 1 and foreign dividends will be taxed at a maximum effective rate of 10 percent. This will be achieved by way of an exemption for individuals of 30/40ths of the foreign dividends received. You will be able to claim any tax paid on foreign dividends in another country as a tax credit.



Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

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