The much anticipated dividends tax provisions contained in Part VIII of the Income Tax Act No. 58 of 1962 ("Act") will become effective on 1 April 2012. In dealing with the transition from the secondary tax on companies ("STC") regime to that of the dividends tax regime, the treatment of STC credits is specifically addressed in section 64J.
The dividends tax provisions allow a company which has STC credits to apply such credits to dividends declared by it on or after 1 April 2012. To the extent certain requirements are met, dividends to which STC credits are applied will not be subject to the dividends tax provisions.
In order for a company to apply any STC credits which it may have to dividends declared by it, the balance of STC credits will firstly need to be quantified.
The STC credit of a company is calculated in a certain manner in terms of section 64J(2). Of particular importance is the provision stating that the STC credit of the company is "reduced by the dividends declared and paid by the company to the extent that the dividends are paid by the company on or after the effective date" – i.e. 1 April 2012.
Interestingly, in applying the STC credits which a company has, section 64J(1) states that a dividend paid by a company will not be subject to the dividends tax to the extent that -
- the dividend does not exceed the STC credit of the company;
and
- the company has by the date of payment notified the person to whom the dividend is paid of the amount by which the dividend reduces the STC credit of the company (our emphasis).
The apparent conflict between section 64J(1) and section 64J(2) is that while the balance of STC credits of a company will automatically reduce by the dividends declared and paid by the company on or after 1 April 2012, such STC credits can only be applied ( that is, the dividends will only be free of any dividends tax being withheld) against such dividend where the company makes the relevant notification highlighted above. No templates or examples showing the format of this notification have been provided by SARS.
A consequence of the notification not being made is that while the company's balance of STC credits will automatically reduce, the dividend will be subject to the dividends tax and the STC credits will be "lost" as the requirements of section 64J(1) will not be met.
It is therefore of great importance that companies with STC credits which declare dividends on or after 1 April 2012 prepare the necessary notifications and ensure delivery of such notifications by the date of payment of the dividend.
We illustrate the effect of non-compliance of the notification requirement by means of the following example -
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Assume Company A has STC credits equal to R91. It declares and
pays a dividend of R91 to Scenario 1: Notification delivered to Mr. A |
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Company A |
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Dividend paid |
R91 |
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Mr A |
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Company A |
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Dividend paid |
R91 |
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Mr A |
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As Company A has failed, in Scenario 2, to carry out the simple administrative task of providing Mr. A with a notification that the dividend reduces the STC credit of Company A by R91, the dividend is subject to the dividends tax provisions and Company A is required to withhold dividends tax on such payment (assuming no exemptions apply to Mr. A). However, Company A has also exhausted its STC credits which cannot be applied against any dividends declared by it. In addition, the dividend received by Mr. A has effectively been subject to two different types of tax, namely STC and dividends tax.
We therefore recommend that companies which have STC credits and which declare dividends on or after 1 April 2012 notify their shareholders that STC credits have been utilised in respect thereof in order to ensure that such dividends are not subject to double tax.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
