Dividends tax to be introduced from April 1st.

The asset management industry is gearing itself up for the implementation of the Dividends Tax, due to be introduced on April 1st 2012. Liz Still, Research Editor of PSG Online / Equinox unpicks the details.

Rationale for the introduction of Dividends Tax

In 2007 the Minister of Finance announced that Secondary Tax on Companies (STC) would be replaced by dividends tax . The reason for the change was that STC is, as the name indicates, a secondary tax on companies. This created the impression amongst foreign investors that South Africa’s corporate tax rate was higher than that of international competitors making South Africa a less attractive investment .

The change to dividends tax therefore aligns South Africa with international standards and best practice. With effect from April 1^st, the recipient of the dividend is liable for the tax relating to the dividend and not the company paying it.

Effectively the South African Revenue Service has ensured that income to the fiscus will not be reduced. The new legislation offers relief to companies for reasons stated above and transfers the dividend tax burden from companies to individuals.

A dividend tax will be imposed on shareholders at a rate of 10% on receipt of dividends. The dividend tax is categorised as a withholding tax, as collection of the tax is withheld and paid to SARS by the company paying the dividend or by a regulated intermediary (i.e. a withholding agent interposed between the company paying the dividend and the beneficial owner), and not the person liable for the tax, the beneficial owner of the dividend.

Who is negatively affected by the introduction of dividend tax?

All individual investors who receive dividends, either from direct share investments on the JSE or via unit trusts or exchange traded funds are affected by this change in legislation. Dividend tax legislation requires that the payment of the tax will normally withheld from the dividend payment by a withholding agent (either the distributing company, the stock broker, asset management or other regulated intermediary) who will then pay the tax to SARS.

Members of close corporations who receive dividends. If a close corporation has a foreign partnership, the foreign partner is exempt from paying dividend tax.

Dual listed companies, which were previously exempt from STC, will not be exempted from dividends tax.

Exemptions

Dividend tax legislation provides for exemptions, depending on the nature or status of the recipient. Examples of exempt entities include the following:

·         * Local companies, (a company which is resident)

·         * Any of the three tiers of government including the national government, provincial administrations and  municipalities;

·         *  Approved public benefit organisations (could be local or foreign, but both must be approved) (section 30(3) of the Act);

·         *  Mining rehabilitation trusts (section 37A of the Act);

·         *  Persons referred to in section 10(1)(cA) of the Act, including Water Boards and Tribal Authorities;

·         *  Pension, provident, preservation, retirement annuity, beneficiary and benefit funds (section 10(1)(d) of the Act);

·         *  Persons referred to in section 10(1)(t) of the Act (CSIR, SANRAL, Armscor, Development Bank of Southern Africa etc);

·         *  A shareholder in a registered micro businesses (6th Schedule of the Act) (insofar as dividend is less than R200,000); and

·         *  Non resident beneficial owners of dividends received from SA listed non resident companies).

There has been some confusion about the first category on the list, ‘a company which is resident’. In a note explaining the changes the Johannesburg Stock Exchange included the following definition of a company, defined by the Income Tax Act 1962 (Act 58 of 1962).

‘Company’ includes

a) any association, corporation or company (other than a close corporation) incorporated or deemed to be incorporated by or under any law in force or previously in force in the Republic or in any part thereof, or any body corporate formed or established or deemed to be formed or established by or under any such law; or
b) any association, corporation or company incorporated under the law of any country other than the Republic or any body corporate formed or established under such law; or
c) any co-operative; or
d) any association (not being an association referred to in paragraph (a) or (f)) formed in the Republic to serve a specified purpose, beneficial to the public or a section of the public; or
e) any –
i) [deleted by the Taxation Laws Amendment Act, No. 17 of 2009]
ii) portfolio comprised in any investment scheme carried on outside the Republic that is comparable to a portfolio of a collective investment scheme in participation bonds or a portfolio of a collective investment scheme in securities in pursuance of any arrangement in terms of which members of the public (as defined in section 1 of the Collective Investment Schemes Control Act, 2002 (Act No. 45 of 2002)), are invited or permitted to contribute to and hold participatory interests in that portfolio through shares, units or any other form of participatory interest; or
f) a close corporation, but does not include a foreign partnership.

Exempt parties should check the SARS website www.sars.gov.za to check the process for applying for exemption documents. Look under 'tax types' on the SARs website.

Reduced rates for foreign residents

Under dividend tax legislation dividend payments to foreign residents may be subject to a reduced rate where the relevant Double Taxation Agreement (DTA) between South Africa and their country of residence provides for such.

This normally requires the foreign beneficial owner to be a company and hold between 10% and 25% of the share capital of the South African company declaring the dividend. In order to qualify the foreign resident needs to declare their status (by way of a similar “declaration” and “undertaking” referred to above) to the company declaring the dividend or the regulated intermediary involved – if they do not declare they will not qualify (despite qualifying in terms of the DTA). Reduced rates were not possible under STC.

Sources

Information for this article was sourced from SARS and from the Johannesburg Stock Exchange Market Notice of 19^th January 2012.

For more information, SARS have a page on Dividends Tax on their website under 'Tax Types'. Visit the SARS site www.sars.gov.za