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“You snooze you lose” if STC credits are not used in time

Wednesday, 30 April 2014   (0 Comments)
Posted by: Author: Carin Grobbelaar
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Author: Carin Grobbelaar

Credits accumulated from the Secondary Tax on Companies (STC) regime can save shareholders significantly by ensuring that less tax is imposed upon shareholder dividends.  But time is running out as the deadline to use these STC credits is looming.

"Some careful planning will need to be considered and this will need to be implemented appropriately as soon as possible, to ensure these credits can be used in time,” says Carin Grobbelaar, senior tax consultant at Grant Thornton Cape Town.

According to Grobbelaar, 1 April 2014 marked the two-year anniversary of the new Dividend Withholding Tax (DWT) regime being implemented. That means that companies now only have one more year to use their STC credits before they are lost forever.

"As a general rule, DWT is a tax imposed on shareholders at a rate of 15% on the gross amount of dividends received and this payment is triggered by the actual payment of the dividend or when the amount becomes due and payable (whichever is earlier),” she continues.

In terms of the DWT regime's rules, a company is allowed to use its STC credit in order to reduce its shareholder's DWT liability.  These STC credits arose from two possible sources - either from unused STC credits brought forward from the final dividend cycle under the STC system or from any new pro-rata portion of STC credits which the company may have received under DWT (minus any dividends paid).

Grobbelaar adds that the STC credit must be allocated pro-rata based on shareholding and the company must notify the shareholders of the amount by which the dividend reduced the STC credit of that company.

In other words, where a company declares a dividend of R1 million and that company has an STC credit of R750 000, the DWT liability will be payable only in respect of the remaining R250 000. Accordingly, the DWT will be R37 500 (R250 000 x 15%) only and not a massive R150 000 (R1 million x 15%).

"This is because 75% of the dividend is not subject to DWT as a result of the use of the STC credit,” says Grobbelaar. "The company must notify the shareholders that its STC credit was reduced by R750 000 and that 75% (R1 million ÷ R750 000) of the dividend paid to each shareholder was not subject to DWT as a result of the use of its STC credit.”

The STC credit must be used within three years after the introduction of DWT in 2012.

In light of this, the balance of all companies' STC credits will be deemed to be nil on or after 1 April 2015.

If the dividend in the example above is paid only after 1 April 2015, the full amount would have to be subject to DWT.  Thus, the amount of DWT will be R150 000 and not R37 000.

"It is critically important to use these STC credits wherever possible before they expire to ‘exempt’ dividends to persons who would otherwise be subject to DWT,” Grobbelaar concludes.  



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