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06 July 2018
Generally speaking, dividends paid by South African companies are exempt from income tax in the hands of shareholders. However, the dividends may be subject to dividends tax, subject to certain exemptions.
Dividends are exempt from income tax even if a person receives the dividend by virtue of a cession to that person of the right to receive the dividend. In a notable exception to this principle, if a shareholder cedes the right only to receive dividends (ie, without transferring the other rights attaching to the underlying shares) to a company, the dividend accruing to the company is subject to income tax in terms of Paragraph (ee) of the proviso to Section 10(1)(k) of the Income Tax Act (58/1962).
But what are the tax implications of the right to receive a dividend in the hands of the cessionary (ie, the person to whom the right is ceded)?
That question was the subject matter in CSARS v KWJ Investments Service (Pty) Ltd (142/2017  ZASCA 81, 31 May 2018).
The facts of the case were relatively complex. Put simply, the taxpayer made an investment with a bank and the return on the investment was that the bank ceded rights to dividends on listed shares to the taxpayer antecedently (ie, before the entitlement to the dividends themselves arose). The question was whether the dividend right constituted 'an amount' that accrued to the taxpayer.
The South African Revenue Service (SARS) contended that where rights to dividends are ceded to a taxpayer, there are two distinct accruals in the hands of the taxpayer:
The taxpayer contended that while the mode of delivery (ie, the cession) was unconditional, the right ceded was conditional on the dividends being actually declared by the companies and the taxpayer therefore held only a contingent right.
On this point, the court found in favour of SARS. It held that the right to the dividends to be declared in future could not be classified as dividends and, accordingly, the right was a separate amount. That right has a monetary value despite the fact that the entitlement to dividends was conditional and, hence, was an amount that accrued to the taxpayer.
Ultimately, the taxpayer won the case on a separate technical point – namely, that SARS had raised the additional assessment after the statutory prescription period.
This case demonstrates that where a taxpayer acquires the right to receive dividends, they must account for tax separately on two distinct receipts:
As pointed out above, the first accrual may, depending on the circumstances, be subject to or exempt from income tax or dividends tax in the hands of the taxpayer.
With regard to the second accrual, the incidence of tax will depend on the transaction giving rise to the receipt. For example, if a taxpayer transfers a revenue asset (eg, trading stock) to a person, and that person in exchange transfers the right to receive a dividend to the taxpayer, the taxpayer will need to include the amount of the dividend right as gross income for income tax purposes. If a taxpayer transfers a capital asset to a person and that person in exchange transfers the right to receive a dividend to the taxpayer, the taxpayer would – for capital gains tax purposes – need to include the amount of the dividend right as proceeds on disposal of the capital asset.
The case also shows again that the incidence of tax on the cession of the rights to dividends is a minefield and taxpayers should exercise great caution when entering into transactions of this kind.
For further information on this topic please contact Ben Strauss at Cliffe Dekker Hofmeyr by telephone (+27 21 481 6300) or email (email@example.com). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.
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