Industrial policy tax incentives

Tim Desmond, Director - Tax and Commercial Departments Garlicke & Bousfield Inc.

The impending replacement of secondary tax on companies (STC) with a dividend tax has given rise to various areas of concern, with regard to different types of taxpayer. There was, for instance, some uncertainty as to how the withholding obligations for the dividends tax would operate in the context of collective investment schemes in securities (or equity unit trusts). The draft Taxation Laws Amendment Bill, 2009 reveals the proposed approach in this regard.

In terms of the draft bill, collective investment schemes in securities will be subject to a simplified flow through / conduit principle for tax purposes. This is intended to eliminate certain anomalies that can arise with regard to the treatment under the current law (for instance for long term life insurance companies, for which there are different tax implications for dividends and interest received).

The amounts distributed by collective investment schemes in securities will be treated as if the underlying amounts received by such schemes flow directly to the investors. These amounts could consist of domestic dividends, foreign dividends and interest. This treatment is dependent upon collective investment schemes in securities making distributions within one year of receiving the underlying amounts. If distributions are not made within such period, interest and potentially foreign dividends will be taxed at the level of the collective investment schemes in securities. In light of such schemes’ distribution obligations, non‑distributions within the one year period are unlikely.

Dividends paid to collective investment schemes in securities will be exempt from dividend tax. Distributions by collective investment schemes in securities will, to the extent that they are attributable to dividends received, be subject to dividend tax.

Collective investment schemes in securities will have a withholding obligation in respect of dividend tax, on distributions that are subject to dividend tax (see above). This withholding obligation will not apply where an investor has provided a written declaration that it is exempt from dividend tax (for example, if the investor is a South African resident company – all of which will be exempt from dividend tax).

Interest and foreign dividends will be taxed at the level of investors effectively on the same basis as under current law. They will, however, be treated as receiving the amounts directly, so certain deeming provisions will fall away.

The replacement of STC with dividend tax is expected to take place in late 2010.