What is dividends tax?

Dividends tax is tax imposed on dividends paid to shareholders of both listed and unlisted companies. South African residents pay dividends tax on dividends paid from both South African companies and foreign companies.

Dividends tax is applied in terms of the Income Tax Act to dividends paid by a company that is a resident company for tax purposes in South Africa or listed on its stock exchange. The tax is applied by way of what is known as a withholding tax.

This means the tax is withheld when the dividend is paid by a company that is resident in South Africa, or by a non-resident foreign company whose shares are listed on a South African exchange, such as the JSE. The tax is paid to the South African Revenue Service (SARS) on your behalf. You receive the dividend after the tax has been deducted.

Dividends tax must be withheld by the company paying the dividend or certain regulated agents such as a stockbroker, a central securities depository service provider, a collective investment scheme or an investment platform.

Dividends paid from a company listed or unlisted in a foreign country are not subject to withholding tax in South Africa, but there may be a tax in the country in which the share is listed. It is your responsibility to declare these dividends and any tax you paid on them in your income tax return.

How much is dividends tax?

Dividends paid by South African resident companies to South African residents are taxed at a rate of 20 percent. This means if a R100 dividend is declared, you should receive R80 after R20 of tax is withheld and paid to SARS.

Dividends paid by foreign companies to South African residents should be declared on your tax return.

The taxed amount will depend on:

• The size of your shareholding – if it is less than 10 percent it can be taxed at the same rate as local dividends – if it is greater, it may be treated as income and taxed at your marginal tax rate. The exception is if a South African resident holds 10 percent or more shares and has voting rights in a foreign company – in this case the dividends are exempt from income tax;
• What type of shares you hold;
• Whether you have paid any tax on the dividends in the foreign country where the company that issued the dividends is based; and
• Whether there is a double taxation agreement between South Africa and that country that allows you to offset the tax paid in the foreign country against the tax paid in South Africa.

After adjusting your foreign dividends for any tax paid in another country recognised in a double taxation agreement, SARS will adjust the dividend amount to ensure that it is taxed at a rate that equates to the 20 percent dividends tax that applies to dividends from South African companies (the formula is 20/45 of the rand value of the dividends).  

Dividends paid by South African companies to non-resident shareholders are also subject to the 20 percent withholding tax on dividends. However, South Africa has tax treaties with several countries, which may reduce the applicable rate for non-resident shareholders. Non-residents need to inform the company or registered agent of their non-resident status in order to qualify for any reduction in the withholding tax rate.

How do shareholders declare dividends to SARS?

The company (listed or unlisted) paying the dividends or the regulated agent – your fund or investment platform - receiving the dividends on your behalf will issue you with a tax certificate known as an IT3b certificate which sets out the dividends you were paid and the tax that was withheld.

This information will also be sent to SARS and should be prepopulated on your tax return.

When you complete your return, you need to state that you received “Exempt local and foreign dividends” in the section of the return headed “Amounts considered non-taxable”.

You should declare the dividends recorded in the IT3b, but you do not need to declare the withholding tax that was paid on your behalf by your fund or investment platform.

If you reinvested the dividends in your investment, dividends tax will still be applied before the dividends are reinvested unless you or the investment are exempt from dividends tax (see below).

If you received dividends from a company listed or unlisted in a foreign country, you must state that you received taxable foreign dividends or dividends deemed to be income or to have accrued to you. There is a question in the tax return that requires you to confirm if you received dividends.

In the Investment income section of the return declare the rand value of the dividends as well as the rand value of any tax you have paid on them in the country in which the company is registered. Use the exchange rate for the tax year published by SARS.

When are dividends exempt from dividends tax?

Dividends do not always attract dividends tax. For individual investors dividends are exempt from this tax when the dividends were earned on investments:

• In a pension, provident, preservation, retirement annuity
• In a beneficiary fund
• In a tax-free savings account
• Made by a special trust with some exceptions, such as when the dividends are earned from an annuity or payments from a foreign dividend

If you have such an investment, the fund or your investment platform which is acting as the regulated agent will inform SARS.

There are also exemptions for other entities – for example, public benefit organisations, South African companies receiving dividends from, for example, subsidiaries and shareholders of registered microbusiness registered for turnover tax as long as the dividend does not exceed R200 000 a year.

This article was written by Smart About Money editor Laura du Preez and reviewed by Gert van Heerden, the head technical practitioner relations and support at the SA Institute of Taxation (the SAIT).