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Bobby Johnston, Chairman of Strate, hosted a number of Dividends Tax (DT)
Seminars in Johannesburg and Cape Town during February 2012

In the wake of these presentations, several delegates submitted additional
questions to Bobby and a list of these, with answers, follows.

######

Background

In his February 2012 Budget Speech, the Minister of Finance announced the
implementation of Dividends Tax (DT), replacing the current Secondary Tax on
Companies (STC), with effect from 1 April 2012. The main purpose of this change is to
align South African tax practices with international norms.

DT is a 15% tax levied on investors receiving dividends paid by South African resident
companies and on foreign dividends where the shares on which the dividends are paid
are listed on the JSE.

While beneficial owners bear the tax, the companies paying the dividends or ‘withholding
agents’ are required to withhold and pay the tax to the South African Revenue Services
on behalf of the ultimate recipients.

While certain legal entity investors such as South African companies, public benefit
organisations and retirement funds are exempt from this tax, all local individual investors
will be liable for DT. Some foreign investors will be exempt from DT and some may be
eligible for a reduced tax rate depending of Double Tax Agreements (DTAs) between
South Africa and the foreign jurisdiction.

#####

Questions and Answers

1. How or who will be taxed when a non trading trust receives a dividend? While
the situation seems to be clear for a vested trust, in the case of a discretionary
trust (to establish whether the dividend is vested or not), does one need to
look at when the dividend was distributed by the trust to the underlying
beneficiaries?

In other words, where dividend income received by the trust was paid out to
the beneficiaries within the same tax year, it is treated, for DT purposes, as if it
was received directly by the beneficiaries. However, where a dividend accrues
to a discretionary trust in a specific tax year but is only paid to the
Directors: MR Johnston (Chairman), MJ Singer Saul (CEO), AF van Eden (COO)*, H van Eeden (CFO and Company Secretary), N
Andrykowsky, RJG Barrow, PL Campher, DJ Davidson*, L Fourie*, RM Loubser, D Naidoo, RSM Ndlovu, NF Newton-King, N Payne, M
Ramplin, MJ Stocks*, A van der Merwe, A J van Vuuren* / Strate Limited, Registration No. 1998/022242/06
*Alternate
beneficiaries in a subsequent tax year, will the trust attract DT at the default
rate of 15%?

Let’s answer this in two parts:

- the first for bewind trusts (where the assets and income actually belong to the
beneficiaries) and vesting trusts, and

- the second for non-vesting trusts.

A trust is not an exempt entity and the nearest analogy is an unregulated
intermediary where one would look to the beneficiaries of the trust. If the beneficiary
is exempt in terms of section 64F, the trustees would have to declare this to the CSD
Participant holding the securities or 15% would be deducted on the full dividend
amount.

In the second case, where income is not vested in the beneficiaries, the dividend first
passes to the Trust and is subject to 15% DT. When the Trustees vest the income in
the beneficiaries at the end of the year, if the beneficiaries are not exempt (like with
individuals) no harm is done as DT has already been levied and paid. If the
beneficiary is exempt (like a PBO), the Trustees would have to reclaim the DT from
the withholding agent (the broker or CSDP, say) so the full dividend can be paid to
the exempt entity.

If the dividends are not vested in the beneficiaries in the year of receipt, the
undistributed dividends will be capitalised (after DT) and a subsequent distribution
from the trust to a beneficiary will be in the form of capital which is presently not
liable to further tax.

2. With regards to share instalment instruments, the holder has paid a certain
amount towards the “full” purchase price of the underlying share and the
terms of the share instalment instrument allows for the holder thereof to be
entitled to the fruits and benefits that accrue to the underlying share which
includes dividends. Is this correct?

This will obviously depend on the terms of the offer. If the holder has the right to
receive the full dividend, he will be the ‘beneficial owner’ of any dividend and will be
liable to the DT.
3. Is the “dividend” distributed by the share instalment issuer (SII) indeed a
dividend as defined?

Directors: MR Johnston (Chairman), MJ Singer Saul (CEO), AF van Eden (COO)*, H van Eeden (CFO and Company Secretary), N
Andrykowsky, RJG Barrow, PL Campher, DJ Davidson*, L Fourie*, RM Loubser, D Naidoo, RSM Ndlovu, NF Newton-King, N Payne, M
Ramplin, MJ Stocks*, A van der Merwe, A J van Vuuren* / Strate Limited, Registration No. 1998/022242/06
*Alternate
As stated above, the dividend ‘belongs’ to the holder and the SII is merely holding
the underlying share as an unregulated intermediary on behalf of the holder. In such
an instance, the SII would have to make a declaration if the holder was exempt from
DT. Otherwise, DT of 15% would be deducted
4. In the event the Share Instalment Issuer holds the underlying share, it can
presumably be accepted that the distribution is a dividend. However, where the
SII does not hold the underlying share, then the distribution cannot be a
dividend? Could it be a manufactured dividend?

Absolutely! Any such payment would not qualify as a dividend in terms of the Income
Tax Act and the SII would have to put the holder into the same position as the holder
would have been had the position been fully covered by underlying shares. This is in
similar fashion to a securities lending transaction.
5. In reporting to SARS, one is required to provide certain information – inter alia,
the dividend declarant with regards to share instalments. Will the Issuer
thereof be the declarant?

Yes, but only for the dividends on those shares held by the SII. As a manufactured
dividend is NOT a dividend, any such payments will not form part of any return by
anyone. They would have to issue a different tax form, if at all, not the Dividend Tax
form.
6. Is one correct in concluding that the Income Tax Act does not acknowledge
dividend stripping – it acknowledges the beneficial owner of the underlying
shares?

What we need to do here is to distinguish between the Act as a whole and section
64, which deals with dividends tax. You are correct in that section 64 does not
acknowledge dividend stripping.

The anti-avoidance changes to sections 10 and 22, however, most definitely
acknowledge dividend stripping for companies and there are two triggers, namely:

 for all companies, whether holding for trading or investment purposes, where
they do not hold the share from declaration date to payment date (it says
“received and accrued” i.e. “paid”), in which case the dividend is treated as
“ordinary revenue”; and

 for trading companies only – the “45 day rule”.

The sections dealing with these issues, i.e. sections 10(1)(k) and 22B, were recently
amended by sections 28 and 46, respectively, of the Taxation Laws Amendment Act,
2011 (Act No 24 of 2011). Please refer to the Explanatory Memorandum issued with
the Act, specifically par 3.16, for some more clarity in this regard. This Act and the
Directors: MR Johnston (Chairman), MJ Singer Saul (CEO), AF van Eden (COO)*, H van Eeden (CFO and Company Secretary), N
Andrykowsky, RJG Barrow, PL Campher, DJ Davidson*, L Fourie*, RM Loubser, D Naidoo, RSM Ndlovu, NF Newton-King, N Payne, M
Ramplin, MJ Stocks*, A van der Merwe, A J van Vuuren* / Strate Limited, Registration No. 1998/022242/06
*Alternate
Explanatory memorandum is available on the SARS website (www.sars.gov.za >
Legal & Policy > Legislation).
7. What is the dividend tax situation where the individual, who was the beneficial
owner of a share, has given up the right to the dividend by ceding it? Is the
dividend still a dividend or does it become ordinary revenue? What if the
payment of the dividend between the individual client and the ceded dividend
is covered by a separate agreement?

This is fully covered in the anti-avoidance clauses and a distinction is drawn between
individuals and corporate. Any dividends ceded to a corporate will be treated as
normal income in its hands.

8. How does dividend tax apply to situations where shareholders can decide
between the cash dividend or the shares offered in lieu of dividends? What
would be the situation with foreign companies?

Elective actions take place BEFORE the corporate action is processed. The cash
element (the dividend) will be processed separately to the shares (a capitalisation
issue) with the cash dividend being subject to DT and the capitalisation issue not (as
it is specifically excluded from the definition of ‘dividend’ in the Income Tax Act).
Foreign companies either adopt:
 a DRIP election where you elect to “bank” your net dividend and use those funds
to buy more shares, or

 a capitalisation issue elective but you would have to understand the foreign tax
laws to establish what was best for you in that cap issues are treated as
dividends and subject to withholding tax in certain jurisdictions.

9. If pledged securities are moved to the account of the pledgee do they not in
fact become a cession and then might be impacted by the new legislation
regarding cession of dividends?

The question states that the securities are “pledged” which means that they remain
the property of the pledgor and the pledgor remains the beneficial owner of the
dividend to be paid. In this case and as long as the securities remain the property of
the pledgor, there is no problem with the pledgor receiving the dividend as the
beneficial owner in terms of section 64.

The market has stretched this to the limit in that they sometimes transfer the
securities to become the property of the “pledgee” who is, in actual fact, the
cessionary in a “pledge and outright cession”. In such a case, as the pledgee is not
long of the securities but square and only “acquired” the securities by way of the
pledge, the dividend would accrue to the “pledgee”/“cessionary” as “normal” income
Directors: MR Johnston (Chairman), MJ Singer Saul (CEO), AF van Eden (COO)*, H van Eeden (CFO and Company Secretary), N
Andrykowsky, RJG Barrow, PL Campher, DJ Davidson*, L Fourie*, RM Loubser, D Naidoo, RSM Ndlovu, NF Newton-King, N Payne, M
Ramplin, MJ Stocks*, A van der Merwe, A J van Vuuren* / Strate Limited, Registration No. 1998/022242/06
*Alternate
in terms of the anti-avoidance clauses and the payment to the pledgor would be a
manufactured dividend as the pledgor would not be the beneficial owner of the
dividend. You have to balance risk against cost as that is what I believe the law
provides.
10. I am grappling with the issue of how we deal with the dividend tax
practicalities in circumstances where the registered owners of shares are not
the beneficial owners. How should Custody deal with this situation?

Withholding tax exemptions in section 64F or relief in terms of a DTA are always
applied at beneficial owner level. In addition, section 64 provides for who has to
deduct and, if the dividend is on-paid to another Regulated Intermediary (RI), the
responsibility to withhold falls away. When paid to an Unregulated Intermediary (UI),
Dividends Tax should be deducted unless you have a declaration from the UI that
the beneficial owners for which it is holding securities are exempt. This should be
accompanied by an indemnity for the RI from the UI.

11. With the move to dividends tax there have been a number of queries on
whether STC or dividends tax is payable. If the dividend is both declared and
paid on or after 1 April 2012 it is subject to dividends tax but if it is declared
before 1 April 2012 and paid thereafter it is subject to STC. Is that correct?

Yes, that is correct. The important matter here is the date of declaration – if on or
before 31 March 2012, STC will be payable irrespective of when it becomes payable.
If declaration takes place on or after 1 April 2012, Dividends Tax will be levied.

12. Consider the following scenario: In February 2012 the directors of a company
recommended that a dividend be paid to shareholders registered on 20 April
(record date) and due and payable on 20 May. Is this dividend subject to STC
or dividends tax? The issue is whether a recommendation by directors
amounts to a declaration. The dividend has to be approved by the
shareholders.

Each company is likely to be different as it depends on the Articles of Association
and the provisions of the Companies Act 2008. You will have to consult with your
legal advisors as to your particular circumstances.

The advice we have had in one such case is the Companies Act overrides the
approval by shareholders and a Directors’ resolution is sufficient to “declare” the
dividend.

As above, I do not believe a generic response is appropriate and you will need to get
advice on this unless you have the ability to take the uncertainty out of the equation
and have the directors declare after 1 April 2012 when there is no debate.

14. In relation to specie dividends in general, below are extracts from the
presentation and we would like to confirm that from an accounting perspective
we are treating such events (although they are rare) correctly.

Each example is different and the treatment is generally included in the Issuer
Documentation that goes out with the scheme announcement/implementation. One
needs to work through all the documentation but some are works of art from a
taxation point of view and well worth the read!
15. From the presentation it seems like we should account for this event by raising
the dividend (dividend tax thus payable but withheld at the company), but also
raise the shares.

You will have to satisfy your Auditors and not me when you pass the entry. I would,
however, merely raise the number of shares received against the value as stated in
the SENS announcement as being the value on which the Company paid Dividends
Tax. How can you raise an amount for which you have no liability or responsibility?

For a specie dividend, the value of the securities distributed is equal to the market
value on the day deemed to be paid. That’s what the Act says. The “deemed to be
paid” is between RD and Payment Date when the new shares are credited to your
safe custody account at your CSD Participant. It all translates to the closing price on
RD.
16. So should the regulated intermediary account for it by raising the dividend in
our system, but allocate it (in terms of dividend tax) as “already taxed”? We
“use” the dividend to purchase the shares.

If the ends justify the means, then by all means! The specie dividend has, in fact,
been taxed already in the hands of the Company concerned and no further tax is
payable.
Again, the specie dividend treatment will all be contained in the various
announcements and documentation. Do not confuse a specie dividend receiving
shares directly from a company with no DT payable by the shareholder, with a DRIP
where you first get a cash entitlement and then use that after-tax entitlement for the
DRIP manager to buy further shares in the market.

Let’s get all these various concepts cleared for once and for all.
There is no longer such thing as a “scrip dividend” – only:
 “Capitalisation Issues” (not a dividend at all);

 “in specie dividends”;

 CTC reductions (not a dividend at all);

 DRIP schemes; and

 cash dividends.

With a DRIP, the (cash) dividend will be subject to dividends tax first and then the
net proceeds, or such lesser amount as the shareholder may choose, will be
used to buy further shares in the company concerned. This is NOT a
capitalisation issue where the company issues new shares to its shareholder/s.
The terms used are:

i. A capitalisation issue

It involves the free allocation and issue of new shares to existing
shareholders and no cash movement takes place to or from the shareholder
or to or from the Issuer.
ii. DRIP

Where a cash dividend is first paid or accrues to a shareholder and the cash
proceeds are then used to purchase additional shares in the market
iii. In specie dividend

Where the company distributes to it shareholders some of its assets, being
shares held in another company, and NOT cash.
18. In relation to Scrip Dividends, please confirm that the issuing company will
pay the dividends tax applicable (15 %) before issuing [buying] shares to [for]
the beneficial owner and that no exemptions will be applied?

You are confusing a cap issue (company issues its own shares which is NOT
classed as a dividend) with a DRIP (the DRIP agent buys further shares for you with
the net dividend to which you are entitled) and a specie dividend (the company is
liable to pay the tax and no relief is provided to the shareholder – any relief would
accrue to the company including STC credits)

The client is to receive a dividend of R100 and wants to buy shares with the
total dividend:

Dividend R100
Less tax deducted by Issuing company/Regulated
R15
Intermediary
Shares bought for client R 85

b) Partial DRIP

The client is to receive a dividend of R100 and wants to buy shares with 60%
of the dividends:

Dividend to be reinvested R 60
Less Dividends tax deducted on the DRIP portion of R60 R9
Shares purchased for client R 51

Amount Passed to client’s custodian R 40
Less Divided tax deducted on non-DRIP portion of R40 R6
Cash sent to/credited to client R 34

There is still a debate around the methodology and costs of a DRIP scheme but
the basic idea is that the dividends tax is deducted from the gross dividend and
the net amount, or such lesser amount as the client may want, reinvested in
further shares in the company.