Final details of the long awaited replacement of Secondary Tax on Companies (STC) with dividend tax were announced. This 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 dividend tax payable by the shareholder, the effective company tax rate is South Africa is now finally simplified and fixed at 28%, without any further adjustment. Under STC, a company declaring dividends had an effective tax rate of around 35%, when one added the STC to the corporate tax rate. This makes our company tax rate much more competitive and brings our dividend tax system in line with international practice. Critically, this system makes it familiar to international investors and will assist in the creation of tax certainty for foreigners.
Generally, dividend tax will be payable on the payment of any dividend declared by a company. However, certain exemptions will apply to the dividend tax, most importantly where the dividend is declared to another resident company, thus eliminating the payment of dividend tax on inter-company dividend distributions. This will assist groups companies tremendously and will avoid unnecessary administration in groups.
Other exemptions include dividend distributions to exempt entities, such as Public Benefit Organisations (PBO’s) and dividend distributions to the new so-called very small businesses, provided the dividend declared does not exceed R200000 per year. Companies will therefore have to keep detailed shareholder registers to ensure that the correct amount of dividend tax is withheld and paid over to SARS. If not, SARS has the right to estimate an amount of dividend tax and request that the company pay the tax to SARS. The new legislation has more teeth in that it deems the company who fails to withhold the tax, liable for the dividend tax. Directors of private companies need to take specific care as they are personally liable where the dividend 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 dividend 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 R1million x 10/110 which results in STC of R90909, leaving a net dividend for distribution to the shareholder of R909090. Under the new system, the R1million will attract a dividend tax of 10%, which is R100000, and will result in a net dividend of R900000. The shareholder receives almost R10000 less as a dividend.
Subject to certain exceptions, the dividend tax must be withheld by either the company declaring the dividend or a so-called intermediary and paid over to SARS. Similar to the STC system, dividend tax must be paid by the end of the month following the month in which the dividend was paid. As a welcome relief, STC credits under the old system, may be set off against dividend tax for a period of 5 years.
The effective date of the new dividend tax is yet to be determined by Trevor Manual.
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