Here – at last

SA’s com­pany tax rate much more com­pet­i­tive, bring­ing it in line with in­ter­na­tional prac­tice

Finweek English Edition - - Creating Wealth - Jo­han Troskie

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.

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