On 1 April 2012, the new Dividends Tax system replaces Secondary Tax on Companies (STC)…Are you prepared?

On 1 April 2012, the new Dividends Tax system replaces Secondary Tax on Companies (STC)... Are you prepared?

On 1 April 2012, Secondary Tax on Companies (STC) is replaced with the new Withholding Tax on Dividends - or dividends tax (DT), as it’s called. For companies, shareholders and investors alike, the transition to WTD signals huge changes, not least of which is the fact that the recipient of the dividend will pay the tax – not the distributing company.

In a nutshell, how will the new DT system work?
The current STC system: With STC, the company declaring the dividend must pay tax at a rate of 10% of the dividends. The STC is calculated on the “net amount” of a dividend.

Definition: Net amount
Calculated by taking the amount of the dividend that is declared and subtracting any dividends that the company has received, if these dividends received have themselves been subject to STC.

The new DT system: Under the TD system, the liability for tax will fall on the shareholder. The company will withhold the tax from the dividend and pay it to SARS on behalf of the shareholder, who’ll then receive the remaining balance of the dividend.

Remember: The DT is the only tax that the shareholder will have to pay on the dividend.

Example: The two systems compared
GenCorp Pty Ltd has R1 000 profits available to distribute to its shareholder. The effect on the shareholder’s cash flow under each system will be as follows:

STC system	DT System
Under the STC system, the company can pay a dividend of R909 (1000*100/110) and it must pay STC of R91 (10% of R909) on that dividend. The total payout from the company is R1 000. The shareholder receives the dividend of R909.	Under the DT system, the company declares a dividend of the full R1 000, but it must withhold DT of R100 (10% of R1 000) and pay that tax to SARS on behalf of the shareholder. The shareholder then receives the remaining amount of R900.

This example illustrates that the tax on the dividend will generally be slightly higher under the new DT system. Therefore, either shareholders will get less cash from their dividends or companies will have to declare higher profits so that the shareholders end up in the same after-tax position.

Using the same information as above, if the shareholder wanted to end up with the same R909 dividend that he would previously have received under the STC system, the company would have to declare a dividend of R1 010. From this dividend, the company would then pay R101 (10% of R1 010) to SARS on behalf of the shareholder and the remaining R909 would be paid to the shareholder.

To find out more about this new tax, order the Practical Tax Loose Leaf Service for a 14 day risk free trial
In the Practical Tax Loose Leaf Service you’ll uncover the ins and outs of the new dividends tax, including advice on how to get a refund on the tax!