The South African Revenue Service (SARS) recently issued a draft Binding General Ruling (BGR) that seeks to address the tax position regarding the availability of the secondary tax on companies (STC) credits where dividends are declared before 1 April 2015, but paid on or after that date.
By way of background, STC was a tax on the company declaring a dividend. However, with the introduction of the dividends tax regime, effective from 1 April 2012, the tax liability was shifted from the company declaring the dividend (not being a dividend in specie) to the beneficial owner of the dividend. In terms of s64E(1) of the Income Tax Act, No 58 of 1962 (Act), dividends tax must be levied at the rate of 15% of the amount of any dividend paid.
Under the STC regime, companies effectively paid STC on the amount by which the dividends it declared exceeded the amount of dividends that accrued to it during a dividend cycle. To the extent that the dividends accrued to it exceeded the amount of dividends declared by it as at the effective date of dividends tax, companies were given an STC credit that would temporarily reduce any dividends tax liability. Section 64J(1) of the Act stipulates that a dividend paid by a company is not subject to dividends tax to the extent that the dividend does not exceed the STC credit of the company and the company has, by the date of payment, notified the person to whom the dividend is paid of the amount by which the dividend reduces the STC credit of the company. Accordingly, the purpose of s64J(1) of the Act is to prevent the double taxation of profits of the company that were previously subject to STC in the distributing company.
It should be noted that in terms of s64J(5) of the Act, the STC credit of a company is deemed to be nil on or after the third anniversary of the effective date, being 1 April 2015. Accordingly the STC credit of a company should be applied against a dividend paid by a company before 1 April 2015.
Having regard to the wording of s64E(1) read with s64J(1) of the Act, the issue that arises is whether the STC credit of a company can only be applied against a dividend paid by that company before 1 April 2015, or whether the wording of the aforementioned sections can be interpreted broadly so as to include the application of the STC credit against a dividend declared by a company before 1 April 2015 but only paid on or after that date.
In this regard, it is important to note that the wording in both s64E(1) and s64J(1) of the Act refer to a dividend 'paid' by a company. Section 64E(2) of the Act provides that for purposes of a listed company, a dividend must, to the extent that the dividend does not consist of the distribution of an asset in specie, be deemed to be paid on the date that the dividend is paid. A dividend declared by a listed company that consists of the distribution of an asset in specie, must be deemed to be paid on the earlier of the date on which the dividend is paid or becomes due and payable. A dividend declared by an unlisted company must be deemed to be paid on the earlier of the date on which the dividend is paid or becomes due and payable.
In light of the above, SARS ruled that the STC credit of a company must be applied against any dividend paid by that company before 1 April 2015, if all the requirements of s64J(1) are met. The STC credit of a company cannot be applied against a dividend declared by it before 1 April 2015 but which is only paid on or after 1 April 2015.