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 exempt from income tax does not necessarily mean that they are not subject to tax. Dividends tax is imposed at a rate of 20% on all dividends that are declared and paid. The beneficial owner of a dividend, typically the shareholder, is liable for dividends tax in most cases. However, should the dividend in question consist of an asset in specie, the liability falls on the company paying the dividend and not on the beneficial owner. There are instances in which dividends tax will not be levied, specifically where the beneficial owner of the dividend is either a South African resident company, a South African retirement fund, or any other prescribed exempt person. Dividends tax operates as a withholding tax. The company that declares the taxable dividend must withhold and pay an amount directly over to SARS on behalf of the recipient taxpayer. Where a regulated intermediary pays a dividend, it is responsible for withholding the applicable dividends tax. The Income Tax Act, No. 58 of 1962 (the Act) caters for several instances in which a dividend declaring company is freed from the obligation to withhold dividends tax. The dividend declaring company would not have to withhold the dividends tax from the payment of a dividend provided that the dividends are declared to identified persons. These instances include the following: Where the person to whom the payment is made has, before the dividend payment, submitted to the dividend declaring company in the prescribed form that the dividend is exempt from dividends tax in terms of section 64F of the Act; A written undertaking by the beneficial owner in the prescribed form in which the declaring company is informed that the beneficial owner changed or the circumstances affecting the exemption applicable to the beneficial owner changed; Where the beneficial owner forms part of the same group of companies as the dividend declaring company; and Where the payment is made to an intermediary. Irrespective of the instances in which a dividend declaring company is freed from the obligation to withhold dividends tax, it is important to note that withholding tax is more likely than not to be reduced should a double taxation agreement find application. If you want to find out more about dividends tax and how it may affect you, do not hesitate to contact one of our expert advisers for further assistance. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Primary residence exclusion: Things to look out for
The Eighth Schedule of the Income Tax Act, which deals with capital gain tax, allows for exclusion from liability on any gains realised on the sale by a taxpayer of a primary residence on the first R2 million of such gains. There are, however, several more complex matters that often arise in the determination of any gain, and we examine some of those in more detail below. How often do you qualify? There is no limit on the number of times a person can qualify for the exclusion of R2 million, even during the same year of assessment. It applies each time a primary residence is disposed of, and there is no lifetime limit. Thus, a person could qualify for more than one primary residence exclusion in a year of assessment if multiple primary residences were disposed of in that year. Apportionment of the primary residence exclusion when more than one person has an interest in a primary residence The gain threshold operates on a “per primary residence” basis and not on a “per person holding an interest in the primary residence” basis. This requirement means that when, for example, two individuals have an equal interest in the same primary residence, each of them will be entitled to a primary residence exclusion of a maximum of R1 million. In this example, they would also disregard any capital gain or loss if the proceeds on disposal of each person’s share were R1 million or less. This situation would typically apply to spouses married in community of property. When more than one person holds an interest in the same residence, the primary residence exclusion and the proceeds threshold are split only between those persons who occupy the residence as their primary residence. The interests of persons who do not reside in the residence as their primary residence are not taken into account. Only one residence at a time may be a primary residence of a person Only one residence may be a person’s primary residence for any period during which that person held more than one residence. This requirement means that there can never be an overlapping period when one person owns two residences and uses both as primary residences Size of residential property qualifying for exclusion The primary residence exclusion applies only to so much of the land that does not exceed two hectares. For land that exceeds two hectares, it will be necessary to determine the capital gain attributable to the two-hectare portion and apply the exclusion of R2 million against that portion. The land must be used mainly for domestic or private purposes together with the residence. Examples include land containing a swimming pool, tennis court or stables. Whether it is used ‘together’ with the residence is a question of fact. Depending on the facts of each case, there are several potential pitfalls in dealing with the primary residence exclusion, and homeowners are advised to engage professional assistance when dealing with such matters. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)