Long Awaited Dividend Tax Finally Announced
02 January 2009
Posted by: Author: Johan Troskie
Long Awaited Dividend Tax Finally Announced
Details of the long-awaited replacement of Secondary Tax on Companies (STC) with dividend tax were announced recently.This ends months of speculation on how the new tax system will actually work. Conceptually we have moved away from a company tax to an effective tax on shareholders and it is payable on the distribution of dividends by a company.
However, the new rules are still a work in progress requiring further consultation with business and the renegotiation of double tax treaties with several countries to allow for the dividend tax to qualify for tax treaty relief.Treasury has announced that its objective is to allow for treaty relief at 5% and that the new tax will take effect in late 2009 or early 2010.
The dividend tax rate will remain at 10% and will be payable by the shareholder.The change to a dividend tax has simplified the company tax rate and is fixed it at 28%.Under STC, a company declaring dividends had an effective tax rate of around 35%, when one added the STC to the corporate tax rate. Under the new dispensation, our company tax rate is much more competitive and brings our dividend tax system in line with international practice.Critically, this system makes it familiar to international investors and will assist in the creation of tax certainty for foreigners.
Generally, dividend tax will be payable on the payment of any dividend declared by a company.However, certain exemptions will apply to the dividend tax; most importantly where the dividend is declared to another resident company, thus eliminating the payment of dividend tax on inter company dividend distributions.This will assist group companies tremendously and will avoid unnecessary administration in groups.
Other exemptions include dividend distributions to exempt entities, such as Public Benefit Organisations (PBOs) and dividend distributions to the new so-called very small businesses, provided the dividend declared does not exceed R200 000 per year.Companies will therefore have to keep detailed shareholder registers to ensure that the correct amount of dividend tax is withheld and paid over to SARS.If not, SARS has the right to estimate an amount of dividend tax and request that the company pay the tax to SARS.
The new legislation has more teeth, in that it deems the company who fails to withhold the tax liable for the dividend tax.Directors of private companies need to take specific care, as they are personally liable where the dividend tax is not withheld and paid.This may lead to harsh treatment from SARS.The recent amendments further provide for transitional rules to phase out STC credits so that old dividend income, which was subjected to STC, may be cleared from distributable reserves without being taxed again with dividend tax.
Companies will have five years after dividend tax becomes effective to utilise their STC credits. Measures have been introduced to avoid a cascading of taxes as the dividend moves up a corporate chain and South African company-to-company dividends will be exempt.Furthermore dividend payments made to persons who are not the beneficial owners of the shares will also be exempt, subject to certain conditions.Such persons are described as ‘intermediaries’ and may be unregulated intermediaries like vesting trusts or regulated intermediaries like central securities depository participants.
SARS has introduced several new definitions into the Act, including the introduction of a new term; contributed tax capital (CTC) and the replacement of the current definition of dividend.The dividend definition, arguably the most complex definition in the Act, has been replaced with a definition of some four or five lines, and comprises any amount transferred by a company to a shareholder in relation to a share, which is not a reduction of CTC or a share.
The new definition of CTC replaces the old definitions of share capital and share premium and will comprise a company’s share capital and share premium (excluding capitalised reserves),plus amounts received by or accrued to the company as consideration for shares, less so much of that amount transferred by the company to the shareholder.
There are complex rules regarding the determination of a company’s CTC to the extent that shares are issued in return for assets.The new CTC definition must therefore be read with other sections of the Act, namely 24B, 42, 44 and 46. As with all new legislation, there will be drafting anomalies and interpretation difficulties, which will reveal themselves as the new rules are applied to commercial transactions. Some areas, which require clarification in the determination of CTC, include the capitalisation of loans to equity and the provision of services in return for equity.
The dividend tax will not be levied where the recipient is exempt or levied at a reduced rate, where double tax treaty relief applies but the payee must provide certain declarations and undertakings to the company.Under the new system, the shareholder will pay an effective higher amount of tax than that under STC. The dividend is now paid without taking STC into account.
Let’s take this example:
A company declares a dividend of R1 million to its shareholder. Under the STC system, that R1 million is deemed to include the STC.The calculation is then R1 million x 10/110 which results in STC of R90 909, leaving a net dividend for distribution to the shareholder of R909 090.
Under the new dividend tax system, the R1 million will attract a dividend tax of 10%, which is R100 000, and will result in a net dividend of R900 000.The shareholder receives almost R10 000 less as a dividend.Under the new system, SARS will actually collect more tax as a result of the calculation of the tax.
Subject to certain exceptions, the dividend tax must be withheld by either the company declaring the dividend or a so-called intermediary and paid over to SARS.Similar to the STC system, dividend tax must be paid by the end of the month following the month in which the dividend was paid.
Source: By Johan Troskie (TaxTALK)