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“The secondary-tax-on-companies (STC) will come to an end on 31st March 2012. All companies have to declare dividends, even if it means Rnil dividends. ”

Secondary Tax On Companies: Investment Driver?

The secondary-tax-on-companies (STC) will come to an end on 31st March 2012. All companies have to declare dividends, even if it means Rnil dividends.

The STC regime was introduced in 1993 with a view to encouraging investments in the form of the re-investment of retained earnings rather than distribution to shareholders. The move was aimed at ensuring investment in the SA market, even at the time when the economy was unstable due to political changes. Failure to re-invest the company after-tax profits would result in any distribution to shareholders being subjected to an additional tax. The STC was thus a punitive tax over and above the tax on company profits.

Distinction between STC and dividends tax
STC is currently payable at the rate of 10% of the net dividend amount. The net dividend amount is the dividend declared during the dividend cycle less any dividend accrued during the same cycle. For example, if company X declares a dividend of R100 000 on 10 February 2012 and has to date accrued dividends of R80 000 from other companies, the net dividend amount on which STC is payable will be R100 000 less R80 000 which equals R20 000. STC at 10% equal R20 000 x 10% = R2 000. The R2 000 is payable to SARS with the dividend of R100 000 is payable to shareholders.

The R2 000 STC is payable to SARS on the last day of the month following the month in which a dividend is declared. For example, the STC in this case should be payable latest by the end of March 2012 since the dividend was declared on 10 February 2012.

Failure to pay STC by the due date will result in unnecessary penalty and interest from SARS. The IT56 form should be completed to disclose to SARS the declaration and the dividend accrued and the net dividend amount. The STC regime will come to an end on 31 March 2012. STC is not payable where the dividend accrued exceeds the dividend declared. For example, if company X declares a dividend of R80 000 and has accrued dividends of R100 000, the R20 000 will be treated as STC credits. The STC credits should be carried forward to the next dividend cycle in order to be used against the next dividend declaration.

A Dividend Withholding Tax (DWT) on the other hand is a tax levied on the shareholder rather than on the company making the declaration of dividends. The first phase of the DWT was introduced on 1 October 2007 when the STC rate was reduced from 12.5% to 10%. The second phase of the DWT will come into effect on 1 April 2012 when the liability will shift from the company to the shareholder.

STC Credits
The STC credits accrued to companies prior to 1 April 2012 will have to be disclosed to SARS through an IT56 form. This must be done through a declaration of dividends on 31 March 2012, even if it means a Rnil declaration.

In terms of the amendment to section 64B of the Income Tax Act, any company that does not declare actual dividends on 31 March 2012 will be deemed to have declared a dividend of Rnil and will be required to submit IT56 form by the end of April 2012.

For example, a company with STC credits of R100 000 may declare dividends of Rnil on 31 March 2012 to arrive at net dividend amount of R100 000, as follows:

dividend declared of R0, less dividends accrued of R100 000 equals STC credits of R100 000. The R100 000 credits will then be carried forward into the new DWT regime on 1 April 2012. The STC credits carried forward may be used over a period of five years from 1 April 2012. The DWT regime will come into effect on 1 April 2012.

The DWT will be levied at the rate of 10% on dividends declared and paid by SA resident companies and by foreign companies listed on the Johannesburg Stock Exchange. The declaring companies will be required to withhold and pay over to SARS the dividend tax and pay only the net amount to shareholders.

Exemptions
The following beneficial shareholders will be exempt from dividend tax:

A South African company
Public benefit organizations
The government and semi-government institutions
Pension, provident. retirement annuity funds and similar funds
Environmental rehabilitation trusts
A shareholder in a microbusiness – only R200 000 of the total dividend paid during a particular year of assessment will be exempt
Medical aid schemes.

Qualifying procedures
The exemption from DWT may only apply if the qualifying shareholders or the unregulated intermediaries (e.g. trust holding shares on behalf of beneficial shareholders) submit a declaration to the declaring company that they are an exempt person from DWT. In addition, a tax exempt shareholder will be required to furnish a written undertaking that they will update the declaring company with any changes in the details of the beneficial shareholders. Failure to submit the required declaration and the written undertaking will result in the DWT being withheld on dividends payable or paid to such shareholders.

Foreign shareholders will not be exempt from the DWT. Dividends paid to foreign shareholders will be taxed at either 10% or at a reduced rate provided for in the double tax agreement (DTA) with their resident country. For example, article 7 of the DTA between SA and Germany provides for DWT at the rate of 7.5%, while article 10 of the DTA with Japan provides for the DWT at the rate of 5%.

However, a declaration will have to be made by foreign shareholders to the declaring company that they reside in a treaty country and thus a reduced rate in terms of the “DTA has to apply”. A written undertaking will also have to be furnished by foreign shareholders to the declaring company that they will update the company with changes in the details of the beneficial shareholders. Failure to comply with these requirements will result in the DWT being withheld on dividends paid to foreign shareholders at the rate of 10%.

Illustrative example
Company X is resident of SA and is declaring a dividend of R100 000 on 30 April 2012. Company X has complied with the required procedures and determined the STC credit at 30 March 2012 to be carried forward into the DWT regime.

The STC credit brought forward into the DWT regime is R80 000 as per the IT56 dated 30 March 2012 and submitted to SARS. The following are the shareholders in company X as at 30 April 2012 per X's share register:

A is a shareholder company in Germany, B is shareholder company in SA, C is a foreign individual shareholder in Germany, D is an individual shareholder in SA while E is a medical aid scheme.

X will have to perform the following calculations to account for the dividend declared on 30 April 2012. Refer to the table below:

Shareholder	A	B	C	D	E	TOTAL
Percentage holding	25%	55%	5%	5%	10%	100%
Dividend declared	R25 000	R55 000	R5 000	R5 000	R10 000	R100 000
STC credit used	(R20 000)	(R44 000)	(R4 000)	(R4 000)	(R8 000)	(R80 000)
Net dividend amount	R5 000	R11 000	R1 000	R1 000	R2 000	R20 000
Tax withheld	R375 00	R0 00	R75 00	R100 00	R0 00	R550 00
Net payment	R24 625	R55 000	R4 925	R4 900	R10 000	R99 450

Both the company and the individual shareholders in Germany have their dividends taxed at 7.5% in terms of the DTA, while the SA individual shareholder has its dividend taxed at 10%. The medical aid scheme is exempt from DWT and will receive its gross dividend of R10 000. The SA company shareholder is also exempt from DWT and will receive its gross dividend of R55 000.

Company X will have to send notification to shareholders informing them of the R80 000 STC credit used. Even though the medical aid scheme is exempt from DWT and will never use the STC credit transferred to it, it is still a requirement that X must reduce the STC credit by the portion attributable to the scheme. Similarly, the STC credit attributable to the individual shareholder should be reduced from the R80 000 brought forward, even if it will never be used by each individual shareholder, who can never declare a dividend himself/herself.

While the STC credit to medical scheme and individual shareholder is lost to the fiscus, the STC credit attributable to an SA company shareholder will be transferred to the company for its use against its dividend declaration in future. The R44 000 STC credit is transferred to shareholder B and can be used to reduce the net dividend amount when in future B declares a dividend.

SARS is responsible for overseeing tax compliance in SA and has no jurisdiction in a foreign country. It is doubtful if SARS will insist on the declaring company to send notification of the STC credit used either to foreign shareholders. Many countries have long been on the DWT regime and it is doubtful if such notification will provide any useful information to them over and above the lack of jurisdiction that SARS may have in those countries. Such notification will undoubtedly help all shareholders (including foreign shareholders) to reconcile the DWT expected with the DWT actually withheld. It may be for this purpose, amongst others, that the declaring company will be required to send the notification to all shareholders.

It should be noted that the dividends received on or after 1 April 2012 will not form part of the STC credit. An increase in STC credit can only arise where the declaring company sends notification of an amount by which its own STC credit has been reduced, thereby increasing the STC credit of local company shareholder.

Now assume that company Y declares a dividend of R100 000 on 30 April and has determined its STC credit on 31 March in compliance with all the formalities. The STC credit brought forward is R150 000 and Y has a Japanese company shareholder and Japanese individual shareholder.

Y will perform the following to account for the dividend on 30 April 2012. Refer to the table below:

Shareholder	A	B	C	D	E	TOTAL
Percentage holding	25%	55%	5%	5%	10%	100%
Dividend	R25 000	R55 000	R5 000	R5 000	R10 000	R100 000
STC credit used	(R25 000)	(R55 000)	(5 000)	(R5 000)	(R10 000)	(R100 000)
Net dividend	R0 00	R0 00	R0 00	R0 00	R0 00	R0 00
Tax withheld	R0 00	R0 00	R0 00	R0 00	R0 00	R0 00
Net payment	R25 000	R55 000	R5 000	R5 000	R10 000	R100 000

Since Y brought forward into the new regime an STC credit of R150 000 and only declared dividends of
R100 000, Y can pass the benefit on to its shareholders, resulting in no DWT payable by shareholders. The
R100 000 STC credit will be used to arrive at net dividend of Rnil, leaving the STC credit balance at R50 000 to be used against any future dividend declaration. The SA company shareholder B will, in turn, increase its STC credit by R55 000, being its percentage share of STC credit in Y. The R55 000 transferred to B can be used to reduce B's net dividend in future when B declares a dividend.

The STC credit attributable to the medical scheme will be lost to the fiscus, since the medical scheme is exempt from DWT. The STC credit attributable to the SA individual shareholder will be lost to the fiscus since the shareholder can never declare a dividend and thus can never use the STC credit. The STC credit attributable to foreign shareholders will be lost to the fiscus, since the Commissioner does not have jurisdiction over foreign shareholders beyond the DWT.

The balance of deferred tax that may have been raised on the STC credit up to 31 March 2012 will have to be reversed, because the tax benefit will be moving from the companies into the hands of the shareholders. asa

Author: Moraka Joseph CA(SA), MTP(SA), BCom, BAcc, MCom, is Tax Practitioner.

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