Tax Tuesday: The lowdown on dividends tax

Just because you don’t pay income tax on dividends, doesn’t mean they are tax-free. South African dividends carry dividends tax.

Dividends tax is a withholding tax. This means the company declaring the dividend never pays the taxable portion to shareholders – it’s paid directly to SARS on the investor’s behalf. Dividends tax is levied at 20% of dividends received. For example, if a company were to declare a dividend of R100, only R80 will be paid to the shareholder. The remaining R20 is paid to SARS on the investor’s behalf.

However, there are some exceptions where the company declaring a dividend doesn’t need to withhold the tax. Examples include:

South African companies
Public benefit organisations (PBOs)
Collective investment schemes in securities and
Individuals on shares held in a tax-free investment

Aside from tax-free investments, the most common exemption is South African companies. Companies who are shareholders are exempt from dividends tax altogether. In other words, if a South African company had been the shareholder receiving the R100 dividend, no dividends tax would need to be withheld and paid over to SARS. The exempt shareholder-entity must inform the investee (dividend declaring) company that it is exempt from dividends tax for the exemption to apply.

Of course dividends tax cannot be avoided altogether by companies. It’s merely delayed until the company that holds the shares at some stage declares its profits as a dividend to the owners of the company. However, the old tax adage of “tax delayed is tax saved” is true here: the shareholder company now has the opportunity to invest the tax-free dividend (now an additional R20) to generate future returns if the company owners don’t need to access the cash proceeds immediately.

Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday. Don’t miss it!