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I found this article written by Evan Andreou, Investment Specialist, Fairbairn Capital,and felt that it will be of ineterest to you.


From April 1, dividends earned from local shares will also become taxable once they are paid to an investor who is not exempt from dividends tax. Unit trust management companies will receive the dividends tax-free, but dividends tax will become payable once the dividends are paid out to you or they accrue to you (the company uses the dividends to buy more units).

Is this a reason to panic?

I don't think so; it's going to take some getting used to but the nett effect to investors is likely to remain unchanged and there may even be an unintended opportunity in the change, giving us something to potentially market. (More on this later)

Let's look at the past to give us some context:

Dividends were paid by companies from their after tax profits. In addition to company tax there was also a Secondary Tax on Companies (STC)payable at a rate of 10%. On 1 April the STC falls away and is replaced by a withholding tax on dividends. This dividend withholding tax is at a rate of 10%.

Therefore the effect on investors is likely to be neutral as in both cases a 10% tax was effectively levied on dividends; all that is changing is where this tax gets paid in the 'food chain'.

In terms of tax legislation, unit trust companies have been appointed as withholding agents and from April 1 will have to deduct the tax owed from the dividends paid out or that accrue to investors, and pay it over to SARS. Individual investors in unit trust funds will in all likelihood not notice the introduction of dividends tax, because unit trust companies will pay the tax for investors; you will not receive a smaller dividend - the tax will be deducted by the unit trust company rather than by the company that paid the dividends, but the net amount will remain similar.

You will be exempt from dividends tax if you have invested in unit trusts or shares through your retirement fund. In my opinion this gives an RA a potential additional performance boost

Unit trust funds receive dividends from the shares in which they invest on your behalf, and also earn interest from cash deposits and bonds. Up until now, you have had to pay tax only on local and foreign interest and on foreign dividends,up until now, your unit trust company has sent you a tax certificate that states how much interest you earned from your investments during the tax year, and you have been required to declare this amount on your income tax return.

The tax for which you are liable on interest earnings can be reduced by the annual exemption. For the 2011/12 tax year, if you are under the age of 65, you can earn R22 800 in interest before you pay tax on interest, and if you are 65 or older, you can earn R33 000 in interest tax-free each year.

In the next tax year (March 2012 to February 2013), your unit trust management company will send you a tax certificate that will state not only how much your unit trust investment earned in dividends from April 1 but also how much dividends withholding tax was deducted from these dividends and paid to SARS on your behalf.

You will need to declare these amounts on your tax return, but you should not owe any tax on these amounts, because the tax would have been paid on your behalf.

The government has decided to replace STC with dividends tax because most other countries have a dividend tax on shareholders rather than a tax on dividends paid by companies. It has been difficult to explain STC to foreign investors, and the addition of STC to the company tax rate has made South Africa's corporate tax rate appear to be uncompetitive.

All that has effectively happened is the entry point on the accounting ledger has changed, but the end result for investors is pretty much the same

www.fairbairncapital.com


Please feel free to contact me should you have any questions.

Wynand Louw

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