The Provisions of Dividend Tax
20 April 2012
Posted by: Author: Ettiene Retief
The Provisions of Dividend Tax
With the implementation of dividends tax on our door step, replacing STC (secondary tax on companies), it’s important to understand the new provisions. The intended Value Extraction Tax has been deleted and will not kick in on 1 April 2012 with the implementation of the dividends tax.
The definitions with regards to dividends has been in a constant state of change for the past few years, and an import change is the recognition of the ‘beneficial owner’ of dividends as opposed to the owner of the share.The beneficial owner in respect of dividends is the person entitled to the benefit of the dividends attaching to a share.
To the extent that a dividend does not consist of a distribution of an asset in specie, the beneficial owner of the dividend is liable for the dividends tax in respect of such dividend. Where the dividend is a distribution of an asset in specie, the company that declared the dividend is liable for the dividends tax in respect of such dividend. A foreign dividend declared by a non-resident company is only a dividend, as defined, to the extent that such dividend does not consist of a distribution of an asset in specie.
An amount will be a dividend if it is ‘for the benefit or on behalf of any person in respect of any share in that company’. Excluded are amounts transferred or applied:
•Result in a reduction of contributed tax capital;
•Constitute shares in the company making the transfer;
•Constitute the acquisition by a listed company of its own shares on the JSE;
•Constitute a redemption of a participatory interest in a foreign collective investment scheme;
•or Is a foreign dividend.
The definition of dividend as from 1 April 2012 no longer excludes foreign dividends, and only amounts transferred or applied by a resident company is a dividend. Dividend Tax, and the requirement to withhold such tax, applies in respect of dividends declared and paid, or is payable, on or after 1 April 2012. Dividend tax is payable by the last day of the month after the payment of the dividend, or the month after the dividend is payable (STC was based on the declared date and not the payment date).
If dividend is declared and paid on or before 31 March 2012 such is subject to STC. Dividend declared before 31 March 2012 but paid after that date will still be subject to STC.
With regards to the obligation to withhold dividends tax, when a South African resident company other than a ‘headquarter company’ or a non-resident South African listed company declares a dividend, except where:
A declaration and undertaking from the ‘beneficial owner’ is held on a date determined by the company, or if no such date has been determined, the date of payment of the dividend; or
The ‘beneficial owner’ forms part of the same group of companies as the company that declared the dividend (as per section 41 of the Income Tax Act); or the payment is to a ‘regulated intermediary’.
The rate of withholding tax may be less than 15% where a Tax Treaty (DTA) applies, as some Tax Treaties restrict the right to tax dividends or limit / reduce the rate that dividends may be taxed at.
When a regulated intermediary on-pays the dividend, the dividend tax must be withheld, except where the dividend is paid to another regulated intermediary, or required declaration and undertaking is held.
Where the beneficial owner of the dividends is exempt from dividends tax, that beneficial owner must provide a declaration and undertaking. A Company may not determine a shareholder to be exempt without the prescribed declaration and undertaking. Such declaration and undertaking is a prescribed form for the declaration of the shareholder’s exempt status and an undertaking that the beneficial owner will notify the company in the event that such person ceases to be the beneficial owner of the share.
Where the required declaration and undertaking was not held on the relevant date and is received within three years from the date of payment of the dividend, then the company has to refund the dividend tax to the recipient of the dividend. The declaring company must refund the excess out of any dividends tax withheld by it within one year from the date of the submission of the late declaration. If the dividend tax withheld within the one-year period is insufficient to cover the full refund value, then the company may recover the excess from the Commissioner, which must be claimed within four years of the date of payment of the dividend. No refund of dividend tax is available to the company where the required declaration and undertaking was received late in the case of a dividend in specie.
The company paying a dividend in specie is liable for the dividends tax in respect of those dividends, to the extent that:
The dividends tax is based on the market value of the asset on the earlier of the date on which the dividend is paid or is payable.
The dividend in specie is subject to the same exemptions and Treaty relief (DTA reduced rate) as if the dividend had been a cash dividend (provided the required declaration and undertaking is held or the group exemption applies).
Transfer of an interest in a primary residence in terms of section 51A of the Income Tax Act (being the dispensation allowing for the tax-free transfer of primary residence from a company into the hands of the individual) is also exempt.
Dividend is exempt if the beneficial owner is:
•South African resident company;
•Any of the three levels of Government;
•An approved public benefit organisation;
•A mining rehabilitation trust; Institutions established in terms of section 10(1) (cA) or section 10(1) (t) ITA;
•Benefit fund (such as a medical aid scheme);
•Pension, provident, retirement annuity, or preservation fund;
•Shareholder in a registered micro business (up to R200 000 of dividends paid by a micro business in a year of assessment);
•Non-resident if the dividend is paid by a non-resident company listed in the South African JSE.
Companies should on 31 March 2012 determine the value of its STC credits as at that day. STC credits will be valid for a period of five years (expire 31 March 2017). Where a company declares a dividend and has STC credits, these credits can be off set against dividends declared on or after that date and passed on to the recipient of the dividend, which becomes an STC credit available to the recipient.
Passing on of STC credits are subject to the prior written notification by the company declaring the dividend to the recipient of the dividend, of the amount by which the dividend paid has reduced the STC credit of the declaring company. STC credits could be used against in specie dividends.
In terms of the STC provisions, up to 31 March 2012, where a company granted a loan to a shareholder or a connected person in relation to a shareholder, and such loan was not repaid before the end of the following financial year-end, such a loan would be deemed a dividend. Any repayment of the loan (previously deemed a dividend), wholly or partly, by the shareholder or connected person would be deemed to be a dividend that accrued to the company on the date of such repayment. This deemed amount could be deducted when determining the net amount of a subsequent dividend declared by the company. Where a company has previously made an interest-free or low interest loan to a shareholder or connected person, the loan may have been deemed to be a dividend for STC purposes. If the loan is repaid on or before 31 March 2012, an STC credit will be available.
Where a loan or advance is provided by a company to a resident shareholder (other than a company) or to a connected person in relation to the shareholder, the company is deemed to have paid a dividend where the loan is provided interest-free or at low interest rate (a rate lower than the official rate of interest as defined in paragraph 1 of the Seventh Schedule to the Income Tax Act). The dividend is deemed to have been paid on the last day of the company’s year of assessment. Essentially, this deemed dividend will be recognised each year on the last day of the company’s year of assessment.
Source: By Ettiene Retief, Chairperson of SAIPA Tax Committee (Tax Professional)