By Tasneem Gangat, Tax consultant, Grant Thornton Johannesburg
The introduction of the new dividends tax (DWT), coming into effect from 1 April this year, will require that dividend tax is paid to SARS by the company, on behalf of the shareholder, before the dividend is paid out in full and will be levied at a rate of 10% on any dividend which is declared and paid by a South African resident company or a foreign company listed on the JSE.
Whilst the outgoing Secondary tax on Companies, (STC) is a tax cost borne by the company declaring a dividend, DWT is a tax cost carried by the share holder who is a beneficial owner of the dividend.
Companies declaring a dividend will, in the absence of any exemptions mentioned below, be required to withhold DWT from the gross amount of the dividend declared, and the shareholder will therefore receive the net amount after DWT. The declaring company will be required to pay the tax withheld to SARS by the last day of the month following the month of payment of the dividend.
Exemptions
Dividends will be exempt from dividends tax if the beneficial owner is, inter alia, a:
1. A South African company
2. The Government and various quasi government institutions
3. Public Benefit Organizations
4. Environmental rehabilitation trusts
5. Pension, provident and similar funds
6. Medical schemes
7. A shareholder of a micro businesses-however, only the first R200 000 of dividends paid during a particular year of assessment will be exempt.
With respect to the entities above, the onus will be on the shareholders, or unregulated intermediaries (such as a trust holding shares on behalf of a beneficial owner), to submit a declaration to the company that pays the dividends that they are exempt from DWT. In addition, the recipient shareholder must furnish a written undertaking to the company that it will inform it of any change in beneficial owner of the dividends. Failure to obtain such documentation will require DWT be withheld. No declaration or undertaking is necessary in a group situation.
If a company declares a dividend to foreign recipients, the company is required to withhold DWT at either the local rate of 10%, or at a reduced rate if a double taxation treaty permits it.
To qualify for the reduced rate, non-resident shareholders will be required to inform the declaring company that they reside in a treaty country and qualify for a reduced rate of tax in respect of the dividend.
In addition, the foreign shareholder must likewise furnish a written undertaking that it will inform the company in the event of a change of beneficial owner of the dividends. Failure to do so will result in DWT being withheld at the rate of 10%.
What about STC credits?
Under the STC regime, any excess of dividends received over dividends paid is referred to as an “STC credit” and is currently carried forward to the next dividend cycle.
With the introduction of DWT, STC credits can be used for up to 5 years after 1 April 2012. This means that STC credits in existence at the date of the introduction of STC will be available for utilization against DWT. This credit reduces the amount of DWT payable to SARS.
It is important to note that s64B of the Income Tax Act has been amended to provide that all companies that have not declared an actual dividend on 31 March 2012, will be deemed to declare a dividend of R nil and therefore must submit an IT 56 form disclosing the amount of available STC credits, to SARS. Although it would appear that the IT56 form must be submitted by 30 April 2012, we would recommend that this be done as soon as possible after 31 March 2012.
Going forward, where a company that has available STC credits declares a dividend, it will be required to reduce its STC credit pool by the amount of the dividend, regardless of whether or not the dividend is exempt from DWT.
In situations where the recipient shareholder is a South African company which is exempt from DWT, such South African shareholder will then increase its STC pool by a like amount, provided it has received notification from the declaring company that it has reduced its credits. Failure to notify the recipient will render the dividend subject to DWT.
DWT has been a few years in the making – with its introduction around the corner, we would encourage all companies to increase their awareness of the new regime and not to be caught off guard.
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