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
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.