The Taxation Laws Amendment Bill, 2019 proposes to amend the dividend stripping provisions, effective for tax years beginning on or after 1 January 2019.
The Income Tax Act has, for a number of years, contained anti-tax avoidance provisions to prevent an activity known as “dividend stripping.”
Dividend stripping occurs when a resident shareholder in a target company avoids income tax (including capital gains tax) arising on the sale of shares in the target company by having the target company declare an extraordinarily large dividend to that resident shareholder prior to the sale of the shares. Absent the dividend stripping rules, this dividend would not only be exempt from tax but would also decrease the value of the shares in the company so that when the shares are disposed of, very little (if any) proceeds would be received. Capital gains tax or income tax in the shareholder’s hands would be reduced or eliminated.
When the dividend stripping rules apply, the exempt dividend is deemed to be additional proceeds received upon disposing of the shares—thereby increasing the taxable gain in the hands of the shareholder.
In 2017, the dividend stripping rules were strengthened considerably, and now target transactions in which extraordinary dividends are received within 18 months prior to the disposal of the shares. These provisions are contained in section 22B and paragraph 43A of the Eighth Schedule to the Income Tax Act.
Because the current dividend stripping provisions unintentionally affected legitimate transactions when shares are disposed of using roll-over corporate relief, the Taxation Laws Amendment Bill, 2019 proposes to amend the dividend stripping provisions.
Under the measures, the dividend stripping rules would require:
Read an October 2018 report [PDF 98 KB] prepared by the KPMG member firm in South Africa
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