In a long awaited announcement it was indicated by the Minister of Finance that there are several dividend schemes that undermine the tax base. One method makes use of a scenario where the owner of shares cedes the rights to dividends to a third party in return for a payment. The benefit that a third party receives, is not only found in the exempt dividend, but also an STC credit. Another scheme involves the receipt of dividends from shares in which the taxpayer does not have any meaningful economic risk, ie. where offsetting derivative positions are taken. For instance, somebody can acquire a share on the basis that the share is forward sold at a specified price on day one. Pending the sale of the share in terms of the forward arrangement, dividends are received which are then exempt.
More importantly, there are a number of dividend funds that have made use of a dividend scheme by subscribing for preference shares. In other words, a taxpayer would subscribe for preference shares on the basis that exempt dividends would be generated through means of the preference shares. The taxpayer is not aware of how the dividends are generated as it is generally indicated that such technology is privileged. However, the funds more often than not flow through a loop on the basis that the dividends are indirectly generated from interest-yielding debt. It has been indicated that these schemes will be closed on the basis that the dividends will be treated as ordinary revenue and no longer be exempt.
It is expected that this announcement will have a significant effect on transactions where use is made of preference shares or where exempt returns are guaranteed. The effect of this announcement is that there will have to be a real underlying asset which generates exempt dividends in order for the dividends still to be exempt. Taxpayers will have to closely scrutinise the so-called “black box” in respect of whatever transactions may take place behind the initial preference share transaction. To the extent that the dividends are indirectly generated from interest-yielding debt, the consequence may well be that the dividends are no longer exempt.
It has not been indicated on which date this amendment will take effect.