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Dividends to be lower as new tax is introduced

Tuesday, 17 April 2012   (0 Comments)
Posted by: SAIT Technical
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By Amanda Visser (Published in the Business Day)


THE past few weeks have seen a flurry of activity in preparation for the new dividend tax that becomes effective from Sunday.

An important issue is the increase in the rate from 10% to 15% that has "significantly increased” the effective tax rate of profits earned by, and extracted from a company, says Ernest Mazansky, a director at Werksmans Tax.

He said with secondary tax on companies (STC), the effective combined rate of corporate income tax and STC was 34,5%, while with the dividend tax it is now 38,8%.

"As far as foreign investors are concerned, 38,8% is a very high tax by international standards. This can be significantly reduced by routing the investment through a country with which SA has an appropriate double tax agreement, where the withholding tax will be limited to 5%. This makes the effective tax rate 31,6%,” Mr Mazansky said.T

he dividend tax replaces STC. Liability for paying the tax rests with the shareholder, although the company declaring the dividend will act as an agent for the revenue service by withholding the tax.

Finance Minister Pravin Gordhan announced an increase in the rate, from 10% to 15%, in his February budget, catching quite a few people by surprise.

In the February budget review, the minister said the higher rate "will help to mitigate some of the revenue losses” when switching from STC to the new tax. The Treasury estimated the net loss as a result of the change to be R1,9bn.

South African individuals will, however, feel "the biggest pinch” once the new tax is in force as the dividend they will receive will be less than the one they received under the STC-regime, according to Elandre Brandt, tax director at PwC. He said companies should consider changing their dividend policies to help ease the burden of the implementation of the new tax system. "Companies are under no obligation to increase their dividend policy to ensure that their shareholders are in a similar position as they would have been under the STC-regime, but in the interest of investor relations, it may be worthwhile to consider such matters,” he said.

Eugene du Plessis, tax director at accounting firm PKF, agreed that it would be a more "expensive tax” even if the rate had not been increased by 50% in the budget.

He gave an example where a company had profit of R1,65m available for distribution. Under the STC regime at 10%, the shareholder would have received a dividend of R1,5m after the company had paid STC of R150000.

Under the new dividend withholding tax, the shareholder would receive a dividend of R1,402m after the company withheld R247 500, or 15%. The additional cost, as a result of dividend tax, is more than R97 000 and dividend tax therefore is 6,5% higher than STC, according to Mr du Plessis’ calculation.



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