Dividend tax shock for investors

2012-02-23 00:00

CAPE TOWN — Investors got a shock yesterday when Finance Minister Pravin Gordhan announced that the new dividend withholding tax — which replaces the secondary tax on companies (STC) from April — will come into effect at 15%. That is 50% higher than the previous secondary tax on companies rate of 10%.

“This was a big surprise,” said Des Kruger, the director of tax at Webber Wentzel.

“We have all begun preparing for the switch from one regime to the other, but no one expected the rate to change. This is can only be a revenue-raising exercise.”

The new dividends tax was widely welcomed as it replaces a system that was unique to SA, India and Romania. Foreign investors had difficulty in understanding STC, which made their assessment of South Africa as a potential investment destination difficult.

The introduction of the dividends tax brings SA in line with its major trading partners.

While shareholders may be dismayed by the increase, Gordhan said, the increase was made for “equity reasons”.

What this means is that the tax rate between individuals and corporates is being narrowed.

Currently individuals are taxed at 40% and companies at 28%.

“This means that the natural economic response is to retain resources within the corporate,” explains economist Chris Hart. “This will never create jobs on the scale needed. The tax distortion should be that saving and investing are a route to avoid tax, while consumption is where tax is incurred.”

With the introduction of the new dividend tax, the effective corporate tax rate will increase from 35,5% to 38,8%, said Kruger.

This leaves a marginal gap between the 40% paid by [high net worth] individuals and the 38,8% effectively paid by companies.”

This tax does not affect dividends paid to other companies — they are exempt.

Prominent preference shares shed between 1,5% and three persent yesterday following the surprise announcement of a 15% dividend tax. — Moneyweb.

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