DIVIDENDS TAX PROVISIONS
David Warneke
February 2012
Dividends tax provisions
Dividends tax (‘DT’ Part VIII of the Act –
SS64D to 64N) comes
into effect 1 April 2012.
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Reason for introduction
• Dividends tax is a tax on the shareholder at 10% of a dividend declared
whereas STC is a tax on a company declaring a dividend at 10 % of a
dividend declared.
• Under dividends tax, DTA relief may be obtained.
Example:
Result:
SA Co declares a dividend
to its shareholders who are
tax resident in the UK.
The shareholders obtain no relief for
STC paid by SA Co (as in terms of
the Volkswagen case STC is not a tax
on dividends), whereas under the
DTA, the shareholders may obtain
partial relief from dividends tax.
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Transitional issues
• S64E is applicable in respect of
dividends declared and paid on
or after the effective date i.e.
1 April 2012.
• Therefore a dividend declared
and paid on or before 31 March
2012 is subject to STC.
• A dividend declared before 31
March 2012 but paid after that
date will also be subject to STC.
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DT mechanism (1)
•
If a SA resident company other than a
‘headquarter company’, or a non resident SA
listed company declares a dividend, then it must
withhold DT at 10 % from the dividend (although
the rate can be lower if a DTA applies), unless:
-
-
-
a declaration and undertaking (see below)
from the ‘beneficial owner’ is held on ‘a date
determined by the company’, or if the
company did not determine a date, then by
the date of payment of the dividend; or
the ‘beneficial owner’ forms part of the same
group of companies (as per S41) as the
company that declared the dividend; or
the payment is to a ‘regulated intermediary’.
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DT mechanism (2)
•
The declaration form may be prescribed by
the Commissioner, and is to be issued where
the dividend is exempt from DT in terms of
S64F.
•
The undertaking form may be prescribed by
the Commissioner, and is to the effect that
the ‘beneficial owner’ will forthwith inform
the company in writing should the
beneficial ownership change.
•
SARS is loathe to make a standard form
available. What is claims is the ‘minimum
wording’ required is at www.sars.gov.za
under ‘tax types’, ‘dividends tax’, ‘business
requirement specification’.
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DT mechanism (3)
• If the dividend is to be subject to tax
at a rate of less than 10 % due to the
application of a DTA, then the
declaration must state the applicable
percentage to be withheld. This
declaration must be submitted to the
Commissioner ‘at the time and in the
manner prescribed’ in circumstances
where a reduced rate is applied due
to a DTA.
• ‘Regulated intermediaries’ include a
CIS in securities, corporate transfer
secretaries and registered FSPs who
hold investments on behalf of clients
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DT mechanism (4)
• The DT withholding obligation is shifted
to the regulated intermediary
• When a regulated intermediary on-pays
the dividend, DT must be withheld
unless:

the dividend is paid to another regulated
intermediary; or

the above declaration and undertaking is held
by the regulated intermediary on ‘a date
determined by the regulated intermediary’, or if
the regulated intermediary did not determine a
date, then on the date of payment of the
dividend (presumably by the regulated
intermediary).
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DT exemptions – S64F
The dividend is exempt if the beneficial owner is:
• A SA resident company;
• Any of the 3 levels of Government;
• An approved public benefit organisation;
• A mining rehabilitation trust;
• Institutions established in terms of S10(1)(cA) [that provide services to the State or
public and are approved by the Commissioner];
• A benefit fund e.g. medical aid scheme;
• A pension, provident, retirement annuity or preservation fund;
• A S10(1)(t) institution e.g. CSIR, DBSA.
• A shareholder in a registered micro business (up to R200 000 of dividends paid by a
micro business in a year of assessment are exempt);
• A non-resident if the dividend is paid by a non-resident company listed on the JSE.
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STC credit mechanism (1)
•
Where the company declaring the dividend has
an STC credit on 31 March 2012, then this
credit is set off against dividends declared on
or after that date and passed on to the
recipient of the dividend, and becomes an STC
credit available to the recipient.
•
Companies are effectively deemed to have
declared a dividend of Rnil on 31 March 2012
for purposes of computing STC credits available
on that date.
•
The passing on of STC credits is subject to the
prior written notification by the company
declaring the dividend to the person to whom
the dividend is paid, of the amount by which
the dividend paid has reduced the STC credit of
the company (that declared the dividend).
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STC credit mechanism (2)
•
The recipient may or may not be able to use the STC credit (for example where
the recipient is not a company).
•
STC credits will be available against in specie dividends.
•
STC credits expire on 31 March 2017.
•
If a company has previously made an interest free or a low interest loan to a
shareholder or connected person, and the loan was deemed to be a dividend
for STC purposes, then in order to obtain an STC credit for the loan, the loan
must be repaid on or before 31 March 2012. If no STC credit is obtained, the
reserves represented by the loan will potentially be subject to dividends tax.
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Example: STC credit mechanism (1)
Facts:
The shares in SA Co 1 are held 40 %
by SA Co 2 and 60 % by a nonresident company.
SA Co 1 has STC credits of
R1 million at 31 March 2012. It
declares a dividend of R1.5 million
on 30 April 2012 and pays it on
15 May 2012.
SA Co 2 has no STC credits at 31
March 2012. Its shareholders are
natural persons. It declares a
dividend of R2 million on
31 May 2012 and pays it on
20 June 2012.
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Result:
Note: The STC credit
mechanism is applied before
considering S64F exemptions.
Example: STC credit mechanism (2)
SA Co 1:
SA Co 1
SA Co 2
N/R Co
40%
60%
Dividend
declared
600 000
900 000
STC credit
(400 000)
(600 000)
Exemption
(200 000)
Dividend
subject to
DT
DT @ 10%
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-
-
300 000
30 000
• Provided that it notifies SA Co 2 and
the non-resident company in writing by
15 May 2012 of the proportionate
amount of the reduction in its STC
credit due to the dividends paid to
each i.e. R400 000 due to SA Co 2 and
R600 000 due to the non-resident
company, the R1 million STC credit
available to SA Co 1 reduces the
dividend subject to DT.
• Provided that the necessary
declaration and undertaking has been
received from SA Co 1, S64F will
exempt 40 % of the remaining R500 000
dividend i.e. R200 000, leaving DT of
10 % x R300 000 = R30 000 (to be paid
by 30 June 2012 or the last business
day before that date).
Example: STC credit mechanism (3)
SA Co 2
Natural
person
100%
Dividend declared 2 000 000
STC credit
(400 000)
Exemption
-
Dividend subject
to DT
1 600 000
DT @ 10%
160 000
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SA Co 2:
• Provided that it notifies its shareholders
in writing by 20 June 2012 of the
proportionate amount of the reduction in
its STC credit due to the dividends paid
to each, the R400 000 STC credit
available reduces the dividend subject to
DT.
• SA Co 2’s dividend subject to DT is
therefore 100 % of
(R2 million – R400 000) = R1.6 million,
and the DT payable is 10 % of R1.6 million
= R160 000, to be paid by 31 July 2012 (or
the last business day before that date).
Dividends tax refund mechanism (ss64L and 64M)
•
If a declaration is not held on the relevant date and is received within 3 years from
the date of payment of the dividend by a company, say company A, then the
company has to refund the dividends tax to the recipient of the dividend, say
company B.
•
Company B has to obtain the refund from company A, not from the Commissioner.
•
Company A must refund the excess out of any dividends tax withheld by it within 1
year from the date of the submission of the late declaration.
•
If the dividends tax withheld by company A within the 1 year period is insufficient
to cover the full refund then company A may recover the excess from the
Commissioner.
•
The excess recovered by company A from the Commissioner must be claimed within
4 years of the date of payment of the dividend.
•
In the case of a refund by a regulated intermediary, the process works in the same
way as above, except that there is no recovery of an excess from the Commissioner:
the regulated intermediary must refund the dividends tax out of any other dividends
tax withheld by it (with no time limit).
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Example: refund mechanism
Facts:
Company A pays a dividend of R5
million to Company X on 20 May 2012.
A and X are not part of the same group
of companies. No DTA applies.
No declaration was held by A by
20 May 2012.
Result:
A has to withhold R500 000 in
dividends tax and pay it to SARS on or
before 29 June 2012.
• X has until 19 May 2015 to submit the declaration to A. Say X submits the
declaration on 10 Jan 2014.
• A must refund the R500 000 dividends tax to X and must take it out of any
dividends tax withheld by it within 1 year from 10 Jan 2014.
• If dividends tax withheld by A during this period is insufficient to cover the
R500 000 refund, then A must apply to the Commissioner by 19 May 2016 (4
years after the date of payment of the dividend) for the excess to be refunded.
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Dividends in specie (ss 64EA and 64FA)
•
•
•
•
•
The company paying a dividend in specie is liable
for the dividends tax in respect of that dividend
(S64EA): ‘to the extent that’ wording.
The dividends tax is based on the market value of
the asset on the earlier of the date on which the
dividend is paid or is payable.
The dividend in specie is subject to the same
exemptions (S64F) or DTA reduced rate treatment
as if the dividend had been a cash dividend,
provided that the declaration and undertaking are
held or the group exemption applies. (S64FA)
Transfer of an interest in a primary residence per
para 51A is also exempt as a dividend in specie.
As presently worded, no refund of dividends tax is
available to the company where the declaration
and undertaking is received late in the case of a
dividend in specie.
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The meaning of ‘dividend’
• The proposed Value Extraction Tax has been scrapped and S64C will not be
applicable in respect of dividends tax.
• In order to determine whether an amount constitutes a dividend, the definition
of ‘dividend’ in section 1 of the Act has been amended by the Taxation Laws
Amendment Act of 2011.
• In its amended form an amount will be a dividend if it is ‘for the benefit or on
behalf of any person in respect of any share in that company’. Excluded are:
amounts transferred or applied out of contributed tax capital, scrip dividends
and general share buybacks by JSE listed companies.
• The words ‘in respect of’ can be used to imply a wide or a close connection
between the shareholding and the amount received.
• The question of whether or not such a link exists will depend on the facts and
circumstances of each case.
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Examples: Amount received ‘in respect of’ a share
(from 2011 Explanatory Memorandum)
Facts:
Company X is owned 60 per cent
by Individual A and 40 per cent by
Individual B. At the instance of
Individual A, Company X makes a
cash payment of R10 000 to Son
(of Individual A) that is received
by Son as a donation.
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Result:
The R10 000 cash is being applied
to Son in respect of Individual A’s
shares in Company X and should
accordingly be viewed as a
dividend to Individual A. The R10
000 amount should then be
viewed as a donation received by
Son from Individual A.
Low interest loans (S64E(4))
• Where a loan or advance is provided by a
company to a SA resident shareholder (other
than a company) or to a connected person in
relation to such a shareholder, the company
is deemed to have paid a dividend if the loan
is provided ‘by virtue of’ a share in the
company.
• The amount of the dividend is based on the
difference between the official rate of
interest and the interest actually payable
over the period during the year of
assessment for which the loan or advance
was outstanding.
• The dividend is deemed to have been paid on
the last day of the year of assessment.
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Example: low interest loans
Example 1: Adapted from 2011 Explanatory Memorandum
Facts: Company A has a 30 June 2013 year end. A is owned 100 per cent by SA resident
individual. At the instance of the individual, Company makes a zero-interest loan of R1
million to individual on 1 January 2013. The official rate throughout the period was 8 %.
Result: The zero-rated loan is possible because individual owns all the shares of Company A,
thereby being ‘by virtue of’ the shares held by individual. A deemed dividend arises in terms
of S64E, calculated at the official rate as amended applied to the R1 million loan. Dividends
Tax at 10 % is payable on last day of the month following the end of the year of assessment
i.e. 31 July 2013, calculated for the time that the loan was outstanding i.e. 8 % x R1 million
x 181 days / 365 days = R39 671. The dividends tax payable is 10 % of this = R3 967.
•
•
•
The dividends tax would be payable annually (by the company – the dividend is in specie).
The provision is unclearly worded from a transitional point of view: does one only calculate interest
from 1 April 2012?
If the shareholder is also a director, a fringe benefit arises in terms of para 11 of the 7th Schedule.
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Beneficial ownership
The ‘beneficial owner’ is defined in S64D as the person entitled to the benefit of the dividend.
•
•
•
•
•
•
Example: Shares are held by a trust Result: If the beneficiaries of the trust have a vested
right to the dividend, then they are considered to be the ‘beneficial owners’. If the rights are
merely contingent, the trust will be the beneficial owner. This can lead to a double dividends
tax problem (see below).
DTA’s also rely on the concept of beneficial ownership to provide relief e.g. If the beneficial
owner of the dividends is a company which is not a SA resident.
There is lack of consensus internationally regarding the meaning of ‘beneficial ownership’.
In the Canadian case of Prevost (The Queen v Prevost Car Inc 2009 FCA 57) it was held that the
beneficial owner of a dividend is the person who receives the dividends for his or her own
use and enjoyment and assumes the risk and control of the dividend he or she received.
The person who is the beneficial owner of the dividend is the person who enjoys and assumes
all the attributes of ownership.
There is considerable lack of clarity as to whether the definition in S64D would hold sway over
the meaning ascribed to the term in international law (see S233 of the Constitution of SA).
‘S233 of the Constitution of SA provides: ‘Application of international law.—When interpreting
any legislation, every court must prefer any reasonable interpretation of the legislation that is
consistent with international law over any alternative interpretation that is inconsistent with
international law.’
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DT Implications (1)
1. DT is paperwork intensive - obtain the declarations and undertakings so as
not to be out of pocket in terms of cash flow (having to withhold dividends tax
and only reclaim it later, and lowering risk of interest and penalties applying).
In the case of dividends in specie, no refund mechanism is available where the
declaration and undertaking are received late.
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DT Implications (2)
Note the following:
• Even if a dividend is exempt e.g. if the beneficial owner is a SA resident
company, the declaration and undertaking must be held by the date of
payment of the dividend, unless the payment is made to a ‘regulated
intermediary’ or the beneficial owner is part of the same group (per S41
definition).
• Even though DT is a tax on the shareholder, the company paying the dividend
becomes personally liable for the payment of DT. Interest and penalties apply
if DT is not paid on time (by the end of the month following the month of
accrual to the shareholder).
• All directors and shareholders who are regularly involved in the management of
the overall financial affairs of an unlisted company paying a dividend become
personally liable for the DT, interest and penalties due by the company.
(S64K(8)).
• Where DT is payable at a reduced rate as a result of a DTA, the declaration
relied on by the company declaring the dividend must be forwarded to SARS.
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DT Implications (3)
2. Examine corporate structures. The risk is where a beneficial owner in the
structure is a person who is not exempt (e.g. a trust or a non-resident).
•
Example: Shares in SA Co 1 are held by a discretionary trust. The beneficiary
of the trust is SA Co 2. The shareholders of SA Co 2 are natural persons. SA Co
1 declares a dividend.
•
Result: SA Co 2 is not the beneficial owner of the dividend. Since the trust is
discretionary, SA Co 2 merely has a spes and is not ‘entitled to’ the dividend.
Dividends tax must therefore be withheld by SA Co 1 and, if the dividend flows
up to SA Co 2 who on-pays it to its shareholders, dividends tax is deducted
again.
3. STC credits at 31 March 2012 will need to be calculated. 31 March 2012
effectively brings to an end a deemed ‘dividend cycle’ for all companies. This
dividend cycle will not require an STC return to be completed, as it will not result
in dividends tax becoming payable (unless the company actually declares a dividend
on 31 March 2012). Companies will also need to keep track of STC credits, and the
allocation thereof, from this date forward. STC credits must be allocated pro-rata
between the class of shareholders entitled to the dividend.
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Disclaimer
While BDO has taken reasonable steps to ensure that the information
contained herein is reliable and of the highest quality and standard we
cannot be held liable for any mistakes, representations or omissions, or
any loss or damage due to the use of such information. We cannot provide
any warranty or guarantee of any nature, express or implied in respect of
the information contained herein, or the opinions of the presenter.
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