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The proposed amendments regarding dividend stripping rules in the 2019 Budget

Monday, 04 March 2019   (0 Comments)
Posted by: Author: Louis Botha
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Author: Louis Botha (Cliffe Dekker Hofmeyr)

In our Special Edition Budget Speech Alert 2019, we discussed, among other things, National Treasury’s (NT) proposal to address abusive arrangements aimed at avoiding the anti-dividend stripping provisions in the Income Tax Act, No 58 of 1962 (Act). The purpose of this article is to delve into this issue in a little bit more detail.

We firstly deal with the history of the amendments to the anti-dividend stripping provisions and thereafter briefly discuss NT’s proposal in the 2019 Budget.

The 2017 amendments

In 2017, NT amended s22B of the Act and paragraph 43A of the Eighth Schedule to the Act (Eighth Schedule), by replacing the old s22B and paragraph 43A completely, in an attempt to address the abuse whereby share buy-back transactions were concluded by companies wishing to dispose of their shares in another company. Prior to the introduction of paragraph 43A and s22B, companies could dispose of their shares in another company (Target), by having their shares bought back by the Target, followed by the Target issuing shares to the new shareholder. This would result in no dividends tax or capital gains tax (CGT) being payable on the disposal.

In some instances, companies would arrange for the Target to declare a tax-exempt dividend to it, which would reduce the value of the selling company’s shares, so that when the shares are disposed of, the seller’s CGT liability would also be reduced.

Pursuant to the 2017 amendments, if a company sold its shares in one of the ways set out above, the portion of the dividend that exceeds 15% of the market value of the share, ie the extraordinary dividend, would be added to the proceeds from the share sale, which would likely increase the seller’s CGT liability. The only way to avoid this in terms of s22B and paragraph 43A was if the seller holds the shares for at least 18 months after the dividend is declared.

At the time, s22B and paragraph 43A were also made to trump the corporate rollover relief provisions in s41 to s47 of the Act.

The 2018 amendments

In 2018, NT amended s22B and paragraph 43A to address the unintended consequences that arose from the 2017 amendments. In particular where shares were disposed of in terms of the corporate rollover relief provisions after a dividend was declared to a company, the corporate rollover relief would not assist the company disposing of the shares as intended, but would instead trigger a capital gain in the hands of the company disposing of shares in terms of a corporate rollover relief provision.

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