What is a dividend and dividends tax?

This is article number four in the series What taxes should my business comply with? In the piece published on 03 April 2018 we listed a range of taxes that you will need to consider when running a business. In this piece we will look at dividends tax and how it impacts on the business and shareholders.

As a business owner you are building a business with the main goal to generate and create wealth for the shareholders. In most cases you will probably be the only shareholder, however the rules don’t change when there is other shareholder involved. The principle remains – you are in business to ultimately create wealth. One of the few ways that a shareholder can externalize profits other than a traditional salary is to declare a dividend from after tax profits to its shareholders.

What is dividends?

In order to understand what dividends tax is, we first need to know what a dividend is, how it is funded and who receives it.

The income tax act defines a dividend as follow.

  • A dividend is an amount transferred or applied by a company.

  • That company must be a South African resident.

  • It must be a payment for the benefit of a person or it can be a payment on behalf of any person

  • There must be a link between the payment and the shares in issue

Specific inclusions in the dividend definition are:

  • Distributions in respect of a share

  • Repurchase of shares

Exclusion from the dividend definition:

  • Any amount transferred or applied that results in the reduction of the company’s contributed tax capital.

  • Issue of capitalization shares in the company

  • Issue of shares as consideration for the repurchase of shares from the shareholder

  • An acquisition by the company of its own securities by way of a general repurchase of securities arrangement.

What is dividends tax?

Dividends tax is a withholding tax, borne by the shareholder but paid over to SARS by the company issuing the dividend. You will find that some accountants refer to it as dividends withholding tax or DWT. It is currently levied at 20%, after it was increased from 15% to 20%, effective 22 February 2017.

Dividends tax is payable to SARS by the last day of the month of the date of payment of the dividends to the shareholder.

Example of the application:

On 09 January 2018, Example (Pty) Ltd declares a dividend of R 200 000 to Mr. Owner, the only shareholder of the entity. This dividend is payable by 25 February 2018. Due to cashflow constraints the company can only manage payment by 20 March 2018.

Dividends withholding tax is calculated as follow:

Total dividend paid R 200 000.00

Less Dividends tax (R 200 000.00 x 20%) (R 40 000.00)

Net amount paid by Example (Pty) Ltd to Mr. Owner R 160 000.00

Example (Pty) Ltd has to file a dividend withholding tax return and make payment, on behalf of Mr. Owner, to SARS by the end of March 2018.

Please note that this piece is intended to be of an informative nature and that the intricate details and rules of dividends withholding taxes was not covered. Kindly contact Five Oaks Consult to book a detailed consultation.