Amendments to the Taxation Laws Amendment Act, 2018 (issued in early 2019) include measures that affect the dividend exemption for a portfolio of a “collective investments scheme in securities” (CISS)—specifically section 64F(1)(k) of the Income Tax Act No. 58 of 1962.
Section 64F(1)(k) previously provided for the portfolio of a CISS to be exempt from dividends tax. However, with the amendments, this exemption was removed. Thus, there is a question as to whether the portfolio of a CISS is now subject to dividends tax—specifically when a dividend is not “on-distributed” within 12 months of its accrual (by the portfolio of a CISS).
If a portfolio of a CISS invests a portion of its fund in equity shares of a resident company, and that resident company declares a dividend, then the resident declaring company does not need to withhold dividends tax because the dividend is being paid to a regulated intermediary (i.e., the portfolio of a CISS).
To the extent that the portfolio of a CISS distributes this dividend to a unit-holder within 12 months, the dividend will be deemed to have accrued to that unit-holder. Consequently, the unit-holder will be deemed to be the beneficial owner, and the portfolio of the CISS will then be required to withhold and pay the dividends tax to the South Africa Revenue Service (SARS).
When the portfolio of a CISS does not on-distribute dividends within 12 months of accrual, such dividends are deemed to accrue to the portfolio of the CISS.
Given that the exemption applicable to a portfolio of a CISS is no longer available (effective from 17 January 2019), it could be argued that in a situation when a dividend is not on-distributed within 12 months of its accrual (as above), the portfolio of a CISS becomes the beneficial owner of that dividend and is subject to dividends tax at a rate of 20%. On this basis, the portfolio of a CISS would be required to account for, and pay the dividends tax to SARS on the “not on-distributed” dividend.
Tax professionals have expressed an opinion that even with the deletion of the exemption, a portfolio of a CISS would still be “exempt” from dividends tax because section 64F(1)(l) provides for an exemption from dividends tax when the dividend constitutes “income” of that person. In essence, a dividend that is not on-distributed within 12 months of accrual is deemed to become income of that portfolio of a CISS. Consequently, the exemption would apply, and the portfolio of a CISS would not be subject to dividends tax for amounts not on-distributed within 12 months, after 17 January 2019.
Read an April 2019 report [PDF 290 KB] prepared by the KPMG member firm in South Africa
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