New Dividend Withholding Tax: how will it affect you?

As part of his February 2011 Budget speech, Minister of Finance Pravin Gordhan announced that Dividend Withholding Tax would come into effect from 1 April 2012, and that it would replace the current Secondary Tax on Companies. Carla Rossouw discusses this change and its impact on your investment.

In a bid to improve the transparency and equity of the tax system, and ultimately to try and align South African practices with international standards, Secondary Tax on Companies (STC) will be phased out and replaced with a dividend tax at investor level (Dividend Withholding Tax or DWT) on 1 April 2012. Converting STC to DWT is the second phase of this tax reform, which began back in October 2007 when the STC rate was reduced from 12.5% to 10%.

What is Dividend Withholding Tax?

DWT is a 10% tax levied on investors receiving dividends declared and paid by South African resident companies or foreign companies listed on the JSE. Although DWT is a tax borne by investors, it is the responsibility of the companies paying the dividends, or where relevant, certain ‘withholding agents’, to withhold the tax and pay it to the South African Revenue Service (SARS) on behalf of the ultimate recipients.

Allan Gray Unit Trust Management Limited and our investment platform, Allan Gray Investment Services Limited, are examples of ‘withholding agents’. We must therefore pay the tax to SARS on behalf of our investors.

What does this mean for you?

1. Taxation of distributed profits moves from company level to investor level, but will be paid on your behalf
The key difference between DWT and STC is that DWT is a tax levied on investors who receive dividends, whereas STC is a tax payable by the company declaring the dividend. The legal liability for tax on a dividend distribution therefore shifts from the company paying the dividend to the investor (also known as the ‘beneficial owner’) receiving it.

2. The new dividends tax is a final withholding tax set at 10% on dividends paid
This means that if a dividend of R100 is paid, the recipient will receive R90 and SARS R10. The dividend income (R100 in the above example) will still be exempt from normal tax in the beneficiary’s hands because the dividends tax does not influence the normal tax rules. Ten percent will be the final tax payable on the dividend.

For most investors, the introduction of dividend tax will probably go unnoticed. This is because this portion of the dividend is currently paid as STC; in other words, you will not receive a smaller dividend. In addition, DWT will be paid on your behalf, in other words, you do not have to personally pay the tax.

Some investors are exempt from DWT

In certain circumstances, you may be exempt from DWT:

• Dividends paid to South African resident companies or tax exempt institutions, such as public benefit organisations or retirement funds, will not attract DWT provided that the investor has submitted a written declaration to the company or withholding agent.
• If you are a non-resident investor, your dividend tax rate may be reduced where the relevant Double Tax Agreement (DTA) between South Africa and your country of residence provides for a reduction, and the requirements set out in the DTA have been met. The applicable DTA article normally requires the non-resident investor to be a company and to own a minimum percentage of share capital in the South African company declaring the dividend (typically between 10% and 25%). If the dividend is subject to a tax of less than 10%, then you will need to submit a declaration to the company declaring the dividend, or to the withholding agent, stating that a reduced tax should be applied. In the absence of a declaration, the company or withholding agent will withhold tax at the default rate of 10%.
• If you are invested in the Allan Gray Endowment and your policy is allocated to the Individual Policyholder Fund (IPF) as per the ‘Four Funds’ classification, the dividends distributed to your investment account will attract 10% DWT, irrespective of your status. This is because the IPF of the insurer, in this case Allan Gray Life Limited, is the tax payer and not the underlying policy holder.

FOR MOST INVESTORS, THE INTRODUCTION OF DIVIDENT TAX WILL PROBABLY GO UNNOTICED

Next steps

If you are an individual and resident in South Africa for tax purposes your investment account will attract DWT at the default rate of 10%. If not, we will send you a declaration to complete. To ensure that you are taxed at the correct rate, or to establish whether you are exempt from dividend withholding tax, please complete the declaration when it arrives, and send it back to us before 29 February 2012. The information that you provide will cover all future dividend distributions for your investment.

23 February 2012 update

Dividend Withholding Tax (DWT) was set to be introduced at a rate of 10%. However, Minister of Finance Pravin Gordhan announced in the February 2012 Budget speech that this tax will now be increased to 15% in an attempt to make up for the expected net loss of R1.9 billion as a result of the switch over from Secondary Tax on Companies (STC).

With DWT set at 10%, the transition from STC to DWT would have gone unnoticed since it merely involved a shift in the tax liability on a dividend distribution from the company paying the dividend to the investor receiving it. With DWT now set at 15% it may impact South African individuals, trusts, and non-residents, the latter where there is no or limited protection under a Double Taxation Agreement.