TAX: Companies to Consider Easing Burden Of New Dividends Tax
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Finance Minister Pravin announced in the February Budget Review that the new dividends tax system, which replaces secondary tax on companies, will come into effect at 15% on 1 April. This is 50% higher than the previous rate of 10% on secondary tax on companies (STC). The increase in the tax rate will make up for the expected R1,9 billion in losses as a result of those groups who are exempt from the tax, said the Finance Minister.
Entities that are exempt from dividends tax include South African resident companies, retirement funds, the South African government and public benefit organisations. Foreign residents earning dividends from a South African company may suffer dividends tax at a reduced rate (minimum of 5%) if they are able to rely on a double taxation agreement between South Africa and their country of residence.
South African individuals are therefore the shareholders who will feel the biggest pinch once the new dividend tax system is in force, says Elandre Brandt, a Director for International Tax at PwC.
Taking into account the fact that many companies may have set dividend policies in place, the implementation of dividends tax raises the question of whether such policies should be amended to effectively allow organisations to pass their STC savings on to their shareholders, says Brandt. This will assist them in easing the burden of the new dividends tax.
The New Dividend Regime
He explains by pointing to the example of a dividend policy distributing 50% of after tax profits with the after tax profit of the entity amounting to R100, 000. Under the current STC regime, the shareholders would receive a cash dividend of R50,000 and the STC of R5,000 would be endured by the company, leaving the entity with after-dividend retained earnings of R45,000. Under the new dividend tax regime, the dividend declared would still be that of R50,000, but 15% dividend tax would be withheld on payment and the shareholders would receive a net dividend of only R42,500, while the company retains after-dividend earnings of R50,000.
If however, the dividend declared by the company was increased by including STC it will no longer be liable for, it will leave the company in the same position as before but will improve the position of the individual shareholder.
Companies and Their Dividend Policy
Continuing with this example, if the company does gross up the dividend, the dividend declared would be R55, 000 resulting in the net dividend received by the individual shareholders being R46,750. Although this is still less than the dividend they would receive under the current STC regime, it is somewhat more than would have been the case had the dividend not been grossed up at all, he says.
Companies are under no obligation to increase their dividend policy to ensure that their shareholders are in a similar position as they would have been under the STC regime, but in their interest of investor relations, it may be worthwhile for them to consider such matters going forward, says Brandt.
He says that there are also a number of administrative requirements that will have to be considered regarding the new dividends tax. Under STC, the liability was on the company declaring the dividends and that entity only had to file a single return in respect of the dividend. However, with dividends tax it is necessary to take into account the status of each shareholder to determine how the tax will apply to it. Shareholders that are exempt or qualify for reduced withholding taxes will have to submit declarations to the company or regulated intermediary to ensure that the rate of 15% is not simply applied to the dividend. There will be certainly be challenges in the coming months as people come to grips with this new dividends tax and put the necessary processes in place to ensure that it is properly applied.
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