These provisions generally find application when corporates structure the disposal of “qualifying interests” with the desire to receive an income tax exempt dividend as opposed to taxable income or capital gains. In order to generate the income tax exempt dividend these disposals are generally structured as share buy-back transactions or dividend distributions combined with the immediate disposal of the shares.
If the exempt dividends qualify as “extraordinary dividends” these “extraordinary dividends” are reclassified as income subject to income tax at a rate of 28% or proceeds resulting in a capital gain subject to income tax at an effective rate of 22.4%.
These specific anti-avoidance provisions only find application if the corporates dispose of the shares in respect of which the “extraordinary dividends” are received within a period of 18 months of receiving such dividends.
It appears that taxpayers have identified the disposal requirement as a structuring opportunity and devised schemes in terms of which the shares are retained for at least 18 months before the shares are disposed for a nominal consideration.
The structures therefore comprise of a company declaring a substantial dividend, presumably equal to the value of the ordinary shares, followed by a share subscription in terms of which a new investor subscribes for shares in the company. At the time of the subscription the company will have a nominal equity value which enables the new investor to acquire essentially 99.99% of the ordinary shares in issue through the subscription transaction while diluting the “exiting” shareholder. The “exiting” shareholder will retain its 0.01% interest for at least 18 months before disposing the shares for a nominal consideration.
These types of abusive schemes have come to the attention of National Treasury and it is proposed that the share buy-backs and dividend stripping rules are amended with effect from 20 February 2019.
The Minister did not provide any guidance on the nature of the amendments, but taxpayers should expect a complicated provision that might have several unintended consequences.