March 16, 2023

Maximising your dividend income

You could improve your return by selling the share instead of waiting for the dividend payout—but there are caveats. I was recently asked an interesting question about dividends.  The person concerned was curious as to whether—from a tax and return perspective—it is better to take the dividend itself, or sell the share and take the profit prior to the dividend payout. It is therefore important to understand how the declaration and subsequent payment of a dividend impact the share price, all else being equal. The easiest way to explain how this works is through a real-life example—that of thermal coal […]
April 7, 2022

Analysing tax exemption for dividends

Dividends are a valuable part of many shareholders’ income, but even though they are exempt from regular income tax, it does not mean that they are completely exempt from tax. A dividend can be defined as any local or foreign dividend paid by a resident company of South Africa or a foreign country, provided that the foreign dividend is paid as a listed share and to the extent that the foreign dividend does not consist of an asset in specie. Dividends that South African tax residents receive are generally exempt from income tax. However, the mere fact that these dividends are […]
July 19, 2021

Explained: Dividends according to the Income Tax Act

Although there are several exclusions to the general rule, South Africa applies a withholding tax on dividends declared by companies at a rate of 20%. It is essential to appreciate that such a withholding obligation for companies do not arise only on “ordinary” dividends but that the concept of what constitutes a dividend, goes much wider. The Income Tax Act defines a “dividend” as: “any amount transferred or applied by a company that is a resident for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or applied—  (a) by way of a […]
January 19, 2021

What happens when debt is waived?

Many natural persons or trust shareholders in companies are confronted with the unintended tax consequences of owing an amount on a loan account to the company in which they hold those shares. These tax consequences specifically relate to the “deemed dividend” which arises on interest-free loans (related to so-called “debit loans” in companies). In many cases, there is no intention to ever repay the loan account, and shareholders and companies often consider simply waiving these loan accounts. The issue typically arises when the shareholder is not immediately subject to any of the adverse debt waiver provisions of the Income Tax Act. The shareholder often opts to absorb any tax recoupments or base cost adjustments as a result of the debt benefit […]
May 9, 2018

BUYING OUT SHAREHOLDERS

We are often approached by clients to advise on the most tax efficient manner in which a shareholder can sell an investment in a private company. Typically, the parties involve a majority shareholder of a company that is interested in buying out the minority shareholders in the company and which will ensure that that majority shareholder becomes the single remaining shareholder of that company. In essence, two options are available through which a shareholder may dispose of a share in a company to achieve the above goal: it could either sell its shares to the purchasing shareholder, or it could […]
October 12, 2016

DIVIDENDS TAX COMPLIANCE

Our clients will know that the dividends tax replaced the old Secondary Tax on Companies (“STC”) effectively 1 April 2012 already. Briefly, the STC was a tax on companies and calculated as a factor of dividends declared by that company. The regime was somewhat out of touch with international trends though (which also gave rise to certain anomalies when South Africa negotiated double tax agreements with other countries): the international norm is rather what we have in South Africa today too, being a tax on shareholders (as opposed to the dividend declaring company) and which tax is withheld from payment […]
November 9, 2015

How South African dividends are taxed

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. 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 […]
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