STC Credits to Expire on 31 March 2015

dividends 2Companies should take note of the fact that Secondary Tax on Companies (STC) credits that they have accumulated up to 31 March 2015 will expire on that date. The implication is that companies with STC credits should take advantage of the credits by paying dividends on or before 31 March 2015. The benefit of STC credits is only enjoyed at the point where dividends are distributed to shareholders who are not exempt from the Dividends Tax for example where dividends are paid to shareholders who are natural persons. Therefore multi-tier groups of companies will have to pay dividends all of the way up and out of the group on or before 31 March 2015 for the non-exempt shareholders to experience a benefit. The benefit derived by a non-exempt shareholder from an STC credit is that the effective rate of Dividends Tax payable is reduced.

For example, say South African resident company A has two shareholders who each hold 50% of the shares. The one shareholder is a South African resident individual and the other is a South African resident company B. Company A has an STC credit of R100 and pays a dividend of R100 in total.

No Dividends Tax need be withheld by company A from the dividend paid of R100 as the STC credit is sufficient to shield the entire dividend paid from Dividends Tax. Although the dividend paid to Company B would in any event have qualified for exemption from Dividends Tax as it is paid to a South African resident company, a benefit arises for the shareholders of company B as the pro-rata STC credit of R50 is transferred to Company B. If the shares in Company B are held entirely by non-exempt persons such as South African resident individuals, the R50 pro-rata STC credit that was transferred to Company B can be used to shield dividends paid by Company B to its shareholders from Dividends Tax. The potential saving in Dividends Tax therefore occurs at the level where the dividends are paid to non-exempt persons. In this example the monetary benefit of the STC credit is therefore a total of 15 per cent of the R100 available STC credit, in other words R15.

The utilisation of STC credits is subject to the notification by the company declaring the dividend of the amount by which the dividend reduces the STC credit of the company. This declaration needs to be made by the date of payment of the dividend and, in terms of the wording of section 64J(1) of the Income Tax Act, has to be made to all recipients of the company’s dividend, without regard to whether or not such recipients are exempt from the Dividends Tax.

The calculation of STC credits available to a company is the sum of two parts. The first part consists of the amount of the excess of the total amount of dividends that had accrued to the company up to and including 31 March 2012, ignoring certain dividends which were exempt from STC, over the total dividends declared by that company up to and including that date. So if, for example, R2 million in dividends had accrued to a company up to and including 31 March 2012 and R700 000 had been declared by the company up to and including that date, the first amount would be R1 300 000. The second part is the sum of the dividends that accrued to the company on or after 1 April 2012 that was accompanied by the above notification regarding the reduction in the STC credits of the company paying the dividend.

Upon replacement of the STC regime with the Dividends Tax regime with effect from 1 April 2012, it was decided to allow STC credits to be carried forward into the Dividends Tax regime, but with a three year expiry period. Therefore, with effect from 1 April 2015, STC credits throughout the South African tax system will expire. In view of the monetary value attaching to the STC credits, companies with STC credits should therefore consider the payment of dividends prior to this date.

It should also be noted that for Dividends Tax purposes, a dividend other than a dividend in specie that is declared by an unlisted company is deemed to be paid on the earlier of the date of actual payment or when it becomes due and payable. It is submitted that in the case of a demand loan, the crediting of the dividend to the loan results in the amount becoming due and payable’. In the case of a dividend declared by a listed company, the dividend is deemed to be paid on the date that it is actually paid.

In planning for the payment of dividends prior to the expiry of the STC credit regime, companies should also be aware that if interest is incurred to finance the payment of a dividend, such interest may well not be tax deductible as it will not be considered to be incurred in the production of income’.