Dismay over increase in dividend tax
• Companies have to scramble to recalculate amounts after retroactive hike announced
The unexpected retroactive increase in dividend tax has caused consternation among listed companies that have declared but not yet paid dividends. On Friday, a slew of companies that have recently declared dividends were forced to issue Sens announcements informing shareholders the after-tax dividend paid out would be reduced in line with the budget announcement.
On Wednesday Finance Minister Pravin Gordhan announced dividend tax would be increased to 20% from 15%. SA Institute of Tax Professionals CE Keith Engel described the increase in dividend tax as a “collateral consequence of the increase in the top income tax rate”.
Tax experts say while an increase in the top income tax bracket was expected, no one appears to have realised the Treasury would increase dividend tax to discourage arbitrage among top income earners.
The move is directed at individuals who are in a position to reduce their income and increase their dividends to avoid the impact of the new 45% income tax bracket.
Engel said the top marginal income tax bracket had to be in line with the combined corporate tax rate of 28% plus the dividend tax rate to discourage arbitrage. If it is not done, high net-worth individuals could set up a company, funnel their income into it and get paid out in more attractively taxed dividends. Engel described as a “little unfair” and puzzling the fact the dividend tax increase was made effective February 22.
Scores of companies that have reported end-December results and have declared dividends but not yet paid them, have been caught out by the change. The new 45% income tax bracket only takes effect from March 1.
The retroactive nature of the increase is creating extra administration for these companies. Companies are responsible for collecting the tax on the dividends and now have to recalculate the after-tax amount they pay to their shareholders. The full impact of the increased rate will be limited as only individual shareholders, a minority of the total, pay the full rate. Pension fund investors are exempt from dividend tax and foreigners (if there is a tax treaty) are generally limited to 5%-10%.
Sibanye CEO Neal Froneman has hit out at the increased rate. “I don’t think we as a company or our shareholders will get the benefit of a dividend with a 20% withholding tax,” he said.