Here – at last
SA’s company tax rate much more competitive, bringing it in line with international practice
FINAL DETAILS OF THE long-awaited replacement of secondary tax on companies (STC) with dividend tax were announced in Finance Minister Trevor Manuel’s medium-term Budget speech. That ended months of speculation of what the dividend tax would comprise and how the new tax system will actually work. Conceptually, we’ve 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 in 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 you 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, the new system makes it familiar to overseas investors and will assist in the creation of tax certainty for them.
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. That will assist group companies tremendously and avoid unnecessary administration in groups.
Other exemptions include dividend distributions to exempt entities, such as public benefit organisations and dividend distributions to the new so-called very small businesses, provided the dividend declared doesn’t exceed R200 000/year. Companies will therefore have to keep detailed shareholders’ registers to ensure the correct amount of dividend tax is withheld and paid over to the SA Revenue Service. If not, Revenue has the right to estimate an amount of dividend tax and request the company pay the tax.
The new legislation has more teeth, in that it deems the company that fails to withhold the tax, liable for the dividend tax. Directors of private companies need to take specific care, as they’re personally liable where the dividend tax isn’t withheld and paid by that company. That may lead to harsh treatment from Revenue.
Under the new system the shareholder will pay an effective higher rate of tax than that under STC, as a dividend is now declared exclusive of any dividend tax. For example, if a dividend of R1m is declared, under STC that R1m was deemed to include the STC. The calculation can simply be described as R1m x 10/110, which results in STC of R90 909 – leaving a net dividend for distribution to shareholders of R909 090. Under the new system the R1m will attract a dividend tax of 10%, which is R100 000, and result in a net dividend of R900 000. The shareholders receive almost R10 000 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 Revenue. 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 five years.
The effective date of the new dividend tax is yet to be determined by Minister Manuel.