The Dividends Tax regime was implemented just over a year ago on 1 April 2012.
As part of the transitional arrangements from Secondary Tax on Companies (STC) to Dividends Tax, companies had to calculate their STC credits as at 31 March 2012.

In terms of s64J(2) of the Income Tax Act, No 58 of 1962 (Act), a company’s STC credit had to be calculated as the amount by which the dividends accruing to that company in its final dividend cycle exceeds the dividends declared by that company on the final day of that cycle. That is, the STC credit is the net amount of dividends accruing to a company in its final dividend cycle, and which would have been carried forward to the next dividend cycle for STC purposes, had there been such a next cycle.

In terms of s64J(1) of the Act, no Dividends Tax will be payable by shareholders in respect of any cash dividends (or by the company in the case of dividends in specie) until such time as the company’s STC credit has been completely used up. Any dividend declared and paid on or after 1 April 2012 will reduce the company’s STC credit by the amount of the dividend. This does not happen automatically and the company paying the dividend must submit a written notice to the person to whom the dividend is paid stating by how much the company’s STC credit is reduced (s64J(1)(b)).

Where a company has a large STC credit, it is good news for shareholders as they will not be paying Dividends Tax until the STC credit is used up. Companies will however have to use up their STC credits by 1 April 2015 because it will be deemed to be zero at that date.

It is important to appreciate that, where a company pays a dividend to an exempt entity such as another local company, the dividend will in any event reduce the company’s STC credit despite the fact that it is an exempt dividend. However, the company paying the dividend can 'pass on' that portion of its STC credit to the shareholder receiving the exempt dividend where the shareholder is a company.

This means that, in a group context, subsidiary companies can 'move up' their STC credits to the holding company level. This does not happen automatically either and the company paying the dividend must submit a written notice to the company to whom the dividend is paid stating by how much the company’s STC credit is reduced (and therefore by how much the recipient’s STC credit is increased).

The South African Revenue Service (SARS) recently released Binding Class Ruling 99 (ruling). The ruling deals with the obligation of a company to submit a notice to shareholders in terms of s64J(1)(b) of the Act stating the amount by which a dividend reduces the company’s STC credit. The ruling specifically addresses the issue of what constitutes sufficient notification in the context of a listed holding company.

In this particular case the applicant was a listed holding company who would receive dividends from time to time from its subsidiaries, the subsidiaries all having STC credits. The applicant would also from time to time declare interim and final dividends to its shareholders.

The ruling did not address the declaration of dividends by subsidiary companies to the applicant, but focused on the declaration of dividends by the applicant to its shareholders. The ruling specifically indicated that:

• the applicant (or the regulated intermediary through which dividends are paid) need not obtain any declaration claiming exemption from shareholders for them to benefit from the applicant’s STC credit;
• the applicant (or the regulated intermediary through which dividends are paid) has to give notice to its shareholders of the amount by which the applicant’s STC credit is reduced, even where such shareholders are companies; and
• the applicant will be seen as having given sufficient notice if the information is communicated

via:

• SENS;
• the applicant’s website; and
• the central securities depository system of Strate Ltd.

The applicant would be required to publish full details of all dividends paid in respect of a relevant year when it publishes its interim and annual results in the press.

Written by Heinrich Louw, Associate, Tax, Cliffe Dekker Hofmeyr