Last week's article dealt with the dangers of shareholder loans as far as secondary tax on companies (STC) is concerned. This week I'd like to expand on STC, and outline some situations which may be useful from a planning point of view.
Just to recap, though, STC is payable at 12,5 percent on the amount of any dividend declared. If your company or close corporation (CC) declares a dividend of R10 000, it will have to pay R1 250 to the South African Revenue Services (SARS).
This amount is separate from the dividend declared, so if your company or CC intends to distribute all its reserves, it is important to leave enough reserves in the company or CC for it to pay the STC. For example, if your company or CC's total retained reserves amount to R10 000 and you want your company or CC to declare all the reserves as a dividend, the company or CC would need to declare a dividend of R8888,89 and pay R1111,11 to SARS as STC.
As with all taxes, however, there may be situations where the STC is exempted or reduced.
If your company or CC has received any dividends from investments which have not been set off against previous dividend declarations, (assuming these dividends do not relate to subsidiaries which have claimed an exemption (see below), the amounts represented by these receipts may be set off against the dividend paid, and the STC will only be payable on the balance.
If a company within your group of companies declares a dividend to its immediate holding company, it may be able to claim an exemption from STC. This will only apply if the following criteria are met:
* The holding company must have held the subsidiary for the preceding 12 months;
* The holding company must be managed in South Africa and derive at least 90 percent of its profits from a South African source during the three years preceding the date of the dividend;
* The subsidiary must have earned all the profits being declared by the company while it was held by the holding company receiving the dividend; and
* The subsidiary must have notified SARS, in writing, that it has taken advantage of this exemption by not later than the last day on which the STC would have been payable, or by a date approved by SARS. STC is generally payable by the last day of the month following the month in which the dividend was declared.
If this exemption has been claimed the holding company may not treat the dividend it receives as a credit against a dividend it declares.
If your company or CC has sold its main assets and, as a consequence, has realised a capital receipt, you may want to consider liquidating or deregistering it rather than declaring a dividend. This is because you will pay STC on the full amount of a going concern dividend, regardless of whether the reserves being distributed are capital or revenue. But if you deregister or liquidate the company or CC an STC exemption applies to capital reserves and reserves which were derived in a year of assessment prior to March 31 1993.
In this case you may declare the dividend "in anticipation of" deregistration or liquidation. But if your company or CC declares the dividend on this basis it must be deregistered or wound up within six months of the declaration. If this cannot be done, then it is important to advise SARS and request an extension because the exemption will fall away if the deadline is not met.
It is important to be aware of these exemptions because your company or CC may pay STC either earlier than it needs to, or when it needn't at all.