New dividend tax will have significant impact on companies, shareholders

Shareholders, trusts and companies need to ensure they are aware of the looming changes to dividends tax legislation as the new Dividend Withholding Tax (DWT) will be effective from 1 April 2012.

“The new way dividends will be taxed can have consequences on both the shareholder and the company declaring the dividend which neither party may be aware of. We therefore encourage companies and shareholders to increase their awareness of the new regime so as not to be caught off guard,” says a Tax Consultant at an Auditing Firm Johannesburg.

The main change is that, unlike under the outgoing Secondary Tax on Companies (STC), this tax cost will no longer be borne by the company declaring dividends. Rather, the DWT will shift the tax incidence to the shareholder and will require that dividend tax is paid to the South African Revenue Services (SARS) by the company on behalf of the shareholder at the time that the dividend is paid.

The new dividend tax will be levied at 10% on any dividend which is declared and paid by a South African resident company or a foreign company listed on the JSE.

Foreign recipients are not excluded. According to her, companies are required to withhold DWT at either the local rate of 10% or at a reduced rate if a double taxation treaty permits it.

“To qualify for the reduced rate, non-resident shareholders will be required to inform the declaring company that they reside in a treaty country and qualify for a reduced rate of tax in respect of the dividend,” she continues.

Another area that would affect companies is with regards to STC credits, or dividends received by a company that is in excess over dividends paid. “Currently this is carried forward to the next cycle, but with the introduction of DWT, these existing credits can only be used for up to five years after 1 April 2012. The credits will reduce the amount of DWT payable to SARS,” she says. In order to make use of any STC credits, the balance of STC credits need to be reported to SARS on 31 March 2012. This will take the form of a deemed dividend declaration of nil and an IT56 form to be completed and submitted to SARS.

Notably, there are exceptions and the DWT will not apply if the beneficial owner of the share is, inter alia:
– A South African company
– The Government and various quasi government institutions
– Public Benefit Organisations
– Environmental rehabilitation trusts
– Pension, provident and similar funds
– Medical schemes
– A shareholder of a micro businesses-however, only the first R200 000 of dividends paid during a particular year of assessment will be exempt.

“With respect to the entities above, the onus will be on the shareholders or unregulated intermediaries, such as a trust holding shares on behalf of a beneficial owner, to submit a declaration to the company that pays the dividends that they are exempt from DWT.

“In addition, the recipient shareholder must furnish a written undertaking to the company that it will inform it of any change in beneficial owner of the dividends. Failure to obtain such documentation will require DWT be withheld,” she says.

TAXtalk: www.taxtalkblog.com

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