I have been getting feedback from my clients and other enquiries relating to the dividends tax to be introduced on April fool’s day (seriously!). The feedback and queries range from; ‘should I cash in my investments?’ through ‘I thought dividends were tax free’ and ‘not another tax’ to ‘what is this new dividends tax?’
The background to the dividend tax, like much of our law, lays in the fact that prior to 1994 South Africa had limited engagement with the outside world. This meant that we had few updated double tax treaties and very little incoming investments. As a result in 2009 we found ourselves, together with Estonia, (where’s that!) and India as the only countries in the world that taxed dividends internally via a tax called STC (Secondary Tax on Companies). Simplified, this tax required a company to pay over 12,5% (more recently 10%) of the value of the dividend that it declared. There was no direct link to the shareholders. Importantly however companies had to contemplate this tax when declaring the dividend and therefore reduce the dividend to enable them to pay the tax.
From April 1 2012 the STC will be replaced by a withholding tax on dividends. This means that the point at which the tax also 10% is recovered will be the stock broker (in the case of directly held shares) and the unit trust company in the case of unit trusts.
The most important thing to note is that the amount available to the company for its dividend will be bigger, because it does not need to pay STC. So, all things being equal, the net dividend you will receive will be about the same (see technical point below). In fact, in the case of Retirement Annuities, Preservation funds and Living Annuities you will be better off because these entities will be exempt from dividends tax, whereas previously the effect of STC was passed through to these funds.
So if it is the same, or similar, why have we done this? Well, the answer lies in globalisation. In terms of many of the world’s double tax agreements a taxpayer can claim the withholding tax on dividends from his foreign shareholdings against his domestic tax bill. This facility was not available in the case of STC (because it was paid over by the company paying the dividend). So to attract incoming foreign shareholders this change was essential.
To conclude then, all that has changed is the point of payment of the tax. The introduction of the tax should make very little difference to the amount of dividends arriving in your share trading account or appearing on your unit trust statement. Those with RA’s, Preservation Funds and Living Annuities will see an increase in the dividends added to these portfolios.
Technical point (not compulsory reading!)
· For those who administer or impact on a PBO (a registered public benefit organisation), you will need to ensure that they are registered as such with the stockbroking firm or unit trust company that holds their investments.
· The effective rate of dividend tax will be slightly higher than under STC because the dividend is now declared gross i.e. there is no tax on the dividend in the company.
For example: if an amount of R100 000 was available to declare, the STC was calculated over and above the dividend. The calculation was R100 000 x 10/110 which equals STC of R9,090. This left R90,909 to be paid in the dividend. Under the new dividend tax the full R100 000 will attract a dividend tax of 10%, which is R10,000, so the net dividend will be R90 000. The shareholder will receives R909 (about 0.9%)less as a dividend.