Dividend Stripping Provisions in Updated Tax Bills

• South Africa
• Africa

• Tax planning and consultancy

06-11-2019

With the delivery of the Medium Term Budget Policy Statement on 30 October 2019, updated and amended draft tax bills have been released highlighting the latest proposed amendments to the relevant tax acts.  The amended bills contain the legislative changes that are proposed following the consolidation of feedback and comments on the draft bills released on 21 July 2019.

A large number of the proposed amendments have been retained without amendment and will certainly affect taxpayers going forward.  One of the more contentious issues that has been retained, relates to the anti-avoidance provisions in relation to the so-called dividend stripping transactions.  Briefly, the augmented anti-avoidance arrangements introduced in 2017 targeted taxpayers who received excessive exempt dividends from the buy-back of their shares as opposed to accounting for any capital gains tax or income tax on the disposal of their shares to a third party.  Certain taxpayers structured their affairs such that they benefited from this perceived loophole.

The 2017 amendments resulted in a taxpayer having to either account for a capital gain or pay income tax (depending on whether the shares were held on capital or revenue account) on the quantum of the extraordinary exempt dividends received upon the buy-back of their shares.

Subsequently, it was found that substantial exempt dividends were declared and at the same time, shares were issued to third parties.  The taxpayer benefited from the receipt of the exempt dividends coupled with a corresponding dilution in shareholding without any adverse tax consequences.

In terms of the latest amendments, a taxpayer need not exit entirely from its shareholding in the underlying company for the dividend stripping provisions to find application.  The mere dilution of shareholding by the issue of shares to a third person can trigger the receipt of a so-called “extraordinary dividend” with the consequent capital gains tax or income tax becoming payable.

A number of comments were received regarding the proposed amendments, including the comment that the anti-avoidance provisions are overly broad.  This was not accepted and in the updated draft bill, the additional anti-avoidance provisions remain.  Effectively, there is a deemed disposal of shares by the company whose shareholding is diluted.

Taxpayers should therefore take care in confirming the application of the dividend stripping provisions where there is a change in shareholding percentage and not only where taxpayers cease to be shareholders.