- Dividend Tax Alert - Practice Development Note
- September 10, 2012
- Law Firm: Norton Rose Canada LLP - Montreal Office
The Minister of Finance had announced an additional amendment to the Taxation Laws Amendment Bill, 2012 (TLAB). The amendment relates to Dividends Tax, and, if implemented, will be back-dated to the date of the media announcement made on 31 August 2012.
The reason given for the change, is that a number of schemes have been implemented, which -
- bring about a separation between the date of declaration of a dividend and the trigger for payment of the tax, being the actual date of payment of the dividend; and
- involved various exempt parties from the Dividends Tax, including South African resident companies and pension funds, being used to change the tax profile of the returns derived from the holding of a share.
These proposed amendments will seek to close the gap in the legislation that these structures seek to exploit, with immediate effect.
The proposed amendment is inserted into the TLAB as a new section 64EB, and is titled “Deemed dividends in specie”. Section 64EB can be usefully summarised as follows -
- If a resident company acquires a right to a dividend by way of cession after the declaration of a dividend, the amount paid by way of that cession will be deemed to be a dividend in specie paid by that resident company to the person ceding the right.
- Where a resident company borrows a share from another person after a dividend is declared and pays an amount for the borrowed share (the manufactured dividend), that amount paid will be treated as a dividend in specie paid by the resident company to that other person.
- If a resident company acquires a share after a dividend declaration from another person, and undertakes to re-sell that share to that other person (or any person connected to that that other person) the resident company will be treated as having declared a dividend in specie to the extent that the purchase price represents compensation for the dividend declared.
- Any amount paid by a resident company pursuant to a share derivative, (for example a share future or contract for difference arrangement) will be treated as a dividend in specie declared by that resident company to the extent that the amount so paid is determined with reference to the value of the share, or any right in respect of that share.
These proposed amendments are to come into effect retrospectively from 31 August 2012. This amendment to the TLAB has only been left open for public comments until 7 September 2012.
The media announcement goes on to address what National Treasury has termed “STC credit schemes”. The STC (Secondary Tax on Companies) credit equivalent mechanism was introduced to allow for the conversion from the old STC regime to the new Dividend Tax regime. The STC credit is designed to equal the dividend accrued during the last dividend cycle that ended on 1 April 2012 plus excess accrued dividends from prior cycles less dividends declared before that date. Under that system, no regard was to be had to dividends accrued in respect of dividends not subject to the STC regime.
Accordingly, it is proposed that the STC transitional rules be more closely linked to the old system to make it clear that STC credits cannot arise from dividends never previously subject to STC.
Revised language was therefore included in the first draft bill that was released as of 5 July 2012. The draft legislation will be revised so that a company paying a dividend with overstated STC credits becomes liable for any tax shortfall. The liability will fall on the paying company (because it is the company paying the dividend that has control over these calculations).
These STC related changes will take effect as of 1 April 2012 to coincide with the dividends tax effective date.