26 July 2009

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Shareholders need to brace themselves to pay tax on dividends when the new dividends tax becomes effective. At this stage it is anticipated to happen in the second half of 2010. But certain areas of the legislation still need to be drafted, for example the deemed dividend rules.

The dividend tax replaces secondary tax on companies (STC), a tax which only South Africa, India and Estonia have, and brings us in line with global norms, says Wessel Smit, a member of SAICA's National Tax Committee.

As the name suggest, STC was paid by companies where as a dividend tax will be paid by the recipient of the dividends. The withholding thereof is however at the company or intermediary level.

The tax is set at 10% of dividends received for local individual taxpayers.
Companies will withhold the tax on any dividend paid unless the recipient is exempt from the tax. SA resident companies, the State, provincial and local authorities, parastatal organisations, retirement and benefit funds, public benefit organisations (PBOs) and mining rehabilitation funds are exempt.

Shareholders

Shareholders will have to pay a slightly higher effective rate of tax than under STC because the dividend is now declared exclusive of any dividends tax, says Ernest Mazansky, head of Werksmans Attorneys tax practice.

For example, if a dividend of R100 000 was declared, under STC, that R100 000 is deemed to include the STC. The calculation can simply be described as R100 000 x 10/110 which results in STC of R9 090, leaving a net dividend for distribution to the shareholder of R90 909. Under the new system, the R100 000 will attract a dividend tax of 10%, which is R10 000, and will result in a net dividend of R90 000. The shareholder receives R909 less as a dividend, says Mazansky.

Also, shareholders need to be aware that the dividend declared by a company is not the dividend they will get, it will be 10% less, says Smit.

If the dividend tax has not been withheld the company or its intermediary will be held liable for the payment of the tax. The company or its intermediary will only be relieved of this liability if the dividend tax is paid by another person for example the shareholder.

The tax must be paid no later than the last day of the month following the month in which the dividend has been paid.

Companies

For companies or their intermediaries, which need to withhold the tax, it could initially create a headache as they will need to clean up their share register, to exclude PBOs, retirement and benefit funds etc, suggests Smit. The administration may also make things difficult when it comes to STC credits, says Smit. The South African Revenue Service (Sars) has given companies five years to utilise their STC credits and has put the onerous on them to notify the recipient in writing of the extent to which the dividend is offset by STC credits.

"Companies will be deemed to have declared a dividend on the day prior to which the dividend withholding tax comes into effect. This will be the last dividend cycle under STC and will fix the balance of STC credits that a company may apply in favour of its shareholders. Thereafter, the STC credit pool will increase by the amount of notified STC offsets in its dividend accruals, and decrease by the allocation of STC credits to its dividend distributions. On the fifth anniversary of the introduction of the dividend tax the STC pool will be deemed to be zero.

"But they have to notify shareholders of the deduction. Failure to do so effectively results in their having to pay double tax. If you don't notify all shareholders, you cannot use the STC credit as far as those shareholders are concerned," says PwC.


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