As from 1 April 2012 Dividends Tax will replace STC (Secondary Tax on Companies) as the tax on dividends. The main difference between the two systems of tax is that with STC the tax is paid by the company declaring the dividend and with Dividends Tax the shareholder receiving the dividend is responsible for the Tax. The tax will be a withholding tax which is payable by the company to SARS on behalf of the shareholder. One of the main reasons for the introduction of Dividends Tax is to come in line with international practice.
The rate of Dividends Tax as from 1 April 2012 will 15%. This has come as bit of a surprise as the rate is 50% higher than the expected rate of 10%, which was the rate of its predecessor, STC. As such it may be worthwhile that companies with significant undistributed reserves declare dividends prior to 1 April 2012 to avoid having to pay increased rate of tax.
Companies have until 31 March 2015 to use any STC credits (i.e 3 years from the effective date).
In terms of the new Companies Act, the following requirements apply before a dividend may be declared and paid:
1. The board must authorise the dividend by resolution.
2. The board must establish whether the company will satisfy the solvency and liquidity tests immediately after payment of the dividend, and if so, acknowledge this by resolution.
If a dividend is declared contrary to these requirements (as set out in more detail in section 46 of the Act), any director of the company who was present at the meeting where the board approved the resolution, and failed to vote against the decision, is liable for any loss, damages or costs sustained by the company due to the contravention.