Increase in the rate of Dividends Tax (2024)

The Minister ofFinance introduced his budget to parliament on 22 February 2017. During thecourse of the budget it was announced that the dividends tax would be increasedfrom 15% to 20%.

In the case offoreign dividends the rate of tax will increase to 20% with effect from 1 March2017.

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

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

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

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

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

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

Mr A left the moneyon loan with the company and his loan account in the company’s was simplycredited. In the case of both dividends the actual crediting of the loanaccount was only effected on 31 July 1993 which was after the introduction ofSTC. The Commissioner: SARS contended that payment took place on the date onwhich Mr A’ s loan account was in fact credited. That is to say on 31 July1993, that is after the introduction of STC and thus issued STC’s assessmentsto the company reflecting tax payable.

Galgut J reached theconclusion that based on the wording of the company’s two resolutions and basedon a proper construction of all the facts that it had been intended to recordthat the dividends concerned would not be paid in cash or by cheque but would beretained by the company as a loan. The court therefore reached the conclusionthat the dividend was paid as required even though it was not in cash or bycheque, 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) inwhich judgment was delivered on 14 May 2002 Heher AJA delivering judgment for theunanimous court stated as follows:

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

The Supreme Court of Appeal has therefore decided that dividends willbe regarded as paid when those amounts are credited to a shareholder’s loanaccount 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 dividendsto escape the increased rate of tax. Where taxpayers seek to fabricateresolutions purportedly giving effect todecisions which were not actually made prior to 22 February 2017, such conductconstitutes tax evasion and will face the full might of the law and the impositionof penalties.

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SARS has indicated that it will audit all dividends paid shortly beforethe increase in rate to ensure the lawfulness thereof. Where, however, theshareholders of a company passed a proper resolution declaring a dividend,having satisfied themselves as to the solvency and liquidity of the company asrequired under the Companies Act, the shareholders have a claim against thecompany for such dividend and will be entitled, based on the case law, to paythe dividends tax at the rate of 15% where such resolution was properly adoptedprior to 22 February 2017.

Based on ITC 1688 it does not appear that the dividendmust have been recorded in the books of account prior to 22 February 2017. Thecourts require that the resolution must have been properly passed giving theshareholder an unconditional right to claim the dividend against the companywhich would confirm that the dividend has been paid as required under section64E of the Act.

National Treasury indicated at the Standing Committee on Financehearings on the National Budget that it may seek to amend section 64E such thatit will be required that the dividend must in fact be paid in cash and not onlycredited to a shareholder’s loan account. Such an amendment would beretrospective and should be resisted on the basis that it violates the rule oflaw and the certainty required under the Constitution of the Republic of SouthAfrica.

Dr Beric Croomeis a Tax Executive at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, April 2017.Image purchased www.iStock.com ©iStock.com/