Monday 10 April 2017

Increase in the rate of Dividends Tax

The Minister of Finance introduced his budget to parliament on 22 February 2017. During the course of the budget it was announced that the dividends tax would be increased from 15% to 20%.

In the case of foreign dividends the rate of tax will increase to 20% with effect from 1 March 2017. 

This is by virtue of the fact that foreign dividends are not subject to withholding tax and it is only possible for taxpayers to report foreign dividends in the tax return to be filed by them which will, in most cases, cover the period 1 March 2017 to 28 February 2018. Thus, the new tax rate will apply in respect of foreign dividends received by affected taxpayers on or after 1 March 2017.

However, in the case of dividends from which dividends tax must be withheld, the adjusted rate will apply in respect of dividends paid on or after 22 February 2017.

The Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2017 was released on 22 February 2017 and that legislation contains amendments giving effect to the various adjustments in tax rates announced in the National Budget. Clause 11 of the draft Bill makes it clear that the adjustment in the dividend withholding tax is deemed to have come into operation 22 February 2017 and applies in respect of any dividend paid on or after 22 February 2017.

Section 64E of the Income Tax Act 58 of 1962, as amended, provides that in the a case of a dividend, other than an award of an asset in specie, declared by a company that is a listed company, is deemed to be paid on the date on which the dividend is paid. In the case of a company which is not listed it is deemed to be paid on the earlier of the date on which the dividend is paid or becomes due and payable.

It is therefore important to consider what is meant by the date on which a dividend can be said to have been paid in the case of an unlisted company.

In ITC1688 [1999],62 SATC 478 the Tax Court was required to determine whether the dividends declared by a company were liable to the erstwhile secondary tax on companies (STC). In ITC 1688 the company declared a dividend on 2 March 1992 and a further dividend on 5 March 1993, that is prior to 17 March 1993, the date on which STC took effect. In neither case was the payment of the dividend made in cash or by cheque.

Mr A left the money on loan with the company and his loan account in the company’s was simply credited. In the case of both dividends the actual crediting of the loan account was only effected on 31 July 1993 which was after the introduction of STC. The Commissioner: SARS contended that payment took place on the date on which Mr A’ s loan account was in fact credited. That is to say on 31 July 1993, that is after the introduction of STC and thus issued STC’s assessments to the company reflecting tax payable.

Galgut J reached the conclusion that based on the wording of the company’s two resolutions and based on a proper construction of all the facts that it had been intended to record that the dividends concerned would not be paid in cash or by cheque but would be retained by the company as a loan. The court therefore reached the conclusion that the dividend was paid as required even though it was not in cash or by cheque, before the introduction of STC.

Subsequently, in the Supreme Court of Appeal case of Commissioner: SARS v Scribante Construction (Pty) Ltd ([2002], 64 SATC 379) in which judgment was delivered on 14 May 2002  Heher AJA delivering judgment for the unanimous court stated as follows:

“ I have already referred to the uncontested practice of the shareholders in using the company as a banker. In that context the crediting of the loan accounts constituted an actual payment as if the dividends had been deposited into an account held by a shareholder at a banking institution”.

The Supreme Court of Appeal has therefore decided that dividends will be regarded as paid when those amounts are credited to a shareholder’s loan account making it clear that it is not necessary to pay a dividend in cash.

Clearly, with the dividends tax rate being increased from 15% - 20% SARS has a concern that unscrupulous taxpayers may seek to backdate dividends to escape the increased rate of tax. Where taxpayers seek to fabricate resolutions purportedly  giving effect to decisions which were not actually made prior to 22 February 2017, such conduct constitutes tax evasion and will face the full might of the law and the imposition of penalties.
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SARS has indicated that it will audit all dividends paid shortly before the increase in rate to ensure the lawfulness thereof. Where, however, the shareholders of a company passed a proper resolution declaring a dividend, having satisfied themselves as to the solvency and liquidity of the company as required under the Companies Act, the shareholders have a claim against the company for such dividend and will be entitled, based on the case law, to pay the dividends tax at the rate of 15% where such resolution was properly adopted prior to 22 February 2017. 

Based on ITC 1688 it does not appear that the dividend must have been recorded in the books of account prior to 22 February 2017. The courts require that the resolution must have been properly passed giving the shareholder an unconditional right to claim the dividend against the company which would confirm that the dividend has been paid as required under section 64E of the Act.

National Treasury indicated at the Standing Committee on Finance hearings on the National Budget that it may seek to amend section 64E such that it will be required that the dividend must in fact be paid in cash and not only credited to a shareholder’s loan account. Such an amendment would be retrospective and should be resisted on the basis that it violates the rule of law and the certainty required under the Constitution of the Republic of South Africa. 

Taxpayers need to consider their position and seek appropriate advice knowing that SARS will no doubt audit and investigate dividends declared particularly in February and credited to loan accounts before 22 February 2017 in light of the substantial increase in the rate of dividends tax from 15% – 20 %.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, April 2017. Image purchased © 

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