Dividends received by a South African taxpayer are generally exempt from income tax. The major exemption though being dividends received from so-called REITs (these being some of the major property owing companies listed on the JSE (such as for example Redefine Properties Ltd). Dividends received from REITs are not exempt from income tax, and will be subject to income tax in the hands of the recipient taxpayer. (Refer section 10(1)(k)(i) of the Income Tax Act, 58 of 1962.)
However, for ‘normal’ non-REIT dividends, merely since dividends are income tax exempt does not mean that dividends are not subject to any tax whatsoever. Dividends are still subject to the dividends tax, which is a tax levied at 15% of dividends received, and are taxed in the hands of the recipient taxpayer. The tax also operates as a withholding tax; in other words, the tax is withheld by the company declaring the dividend and paid over by it directly to SARS on the taxpayer’s behalf. For example, imagine that a company declares a dividend of R100 to a shareholder. Of this amount, only R85 is paid over to the shareholder, with the remaining R15 being paid to SARS on the taxpayer’s behalf.
There are however numerous classes of persons which are exempt from the dividends tax, in which case dividends tax need not be withheld by the dividend declaring company if dividends are declared to these identified persons. The most commonly used of these exemptions is that used by South African companies: they are exempt from dividends tax. In other words, in the example above, if a South African company is the shareholder receiving a dividend, no dividends tax would need to be withheld and paid over to SARS. In addition, the dividend should not be subject to income tax either. The prerequisite for the exemption from dividends tax specifically to apply though is that the exempt entity, such as a company-type shareholder, must inform the investee (or dividend declaring) company that it is such an exempt entity. In other words, the assumption exists that a shareholder is not exempt from the dividends tax, until the declaring company is informed otherwise.
As a result, it may be beneficial for non-exempt entities (such as trusts or individuals) to hold their share portfolios through a wholly-owned company. Besides the added benefits attaching themselves to using a privately owned company through which to hold a shares in companies (such as securing these from attachment by the individual/trust’s current or contingent creditors, or to ensure more efficient management of a portfolio of investments) a company also offers the opportunity to receive returns on investments in the form of dividends more tax efficiently. South African dividends received by a South African company will most likely not be subject to either income tax or dividends tax. Dividends tax considerations are of course not the only factor to take into consideration before such a decision is made, and professional advice should best be obtained from a professional to ensure that correct structuring decisions are made.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)