1714. Shareholders to earn less with new dividends tax
March 2009 – Issue 115
Final details of the long awaited replacement of Secondary Tax on Companies (STC) with dividends tax were announced recently. It ends months of speculation of what the dividend tax will comprise, and how the new tax system will actually work. Conceptually, we have moved away from a company tax to an effective tax on shareholders, payable on the distribution of dividends by a company. As with STC, the dividend tax rate will remain at 10%, and, not being company tax, but a tax payable by the shareholder, the effective company tax rate in South Africa is now finally simplified and fixed at 28%. Under STC, a company declaring its total after tax income as a dividend had an effective tax rate of about 35%, when the STC was added to the corporate tax rate. Critically, the new system will be familiar to international investors, and will assist in the creation of tax certainty for foreigners. This makes the company tax rate much more competitive and brings the dividends tax system in line with international practice.
Generally, dividends tax will be payable on the payment of any dividend declared by a company. However, certain exemptions will apply to the dividends tax, most importantly where the dividend is declared to another resident company, thus eliminating the payment of dividends tax on inter-company dividend distributions.
This will assist group of companies tremendously, and will avoid unnecessary administration in groups. Other exemptions include dividend distributions to exempt entities, such as public benefit organisations and dividend distributions to registered micro-businesses, provided the dividend declared does not exceed R200 000 a year.
Companies will therefore have to keep detailed shareholder registers to ensure that the correct amount of dividends tax is withheld and paid over to SARS. Where intermediaries such as collective investment schemes, long-term insurers and nominee shareholders are involved, the record keeping requirements become substantial.
If not, SARS has the right to estimate an amount of dividends tax and request that the company pay the tax to SARS. The new legislation has more teeth in that it deems the company that fails to withhold the tax to be liable for the dividends tax. Directors of private companies need to take specific care as they are personally liable where the dividends tax is not withheld and paid by that company. This may lead to harsh treatment by SARS.
Under the new system, the shareholder will pay an effective higher rate of tax than that under STC, because the dividend is now declared exclusive of any dividends tax. For example, if a dividend of R1million is declared under STC, that R1million is deemed to include the STC. The calculation can simply be described as R1m x 10/110, which results in STC of R90 909, leaving a net dividend for distribution to the shareholder of R909 090.
Under the new system, the R1million will attract a dividends tax of 10%, which is R100 000, and will result in a net dividend of R900 000. The shareholder receives R 9 090 less as a dividend.
Deneys Reitz
