The demise of STC: SAIF and other dividend returns

The demise of STC: SAIF and other dividend returns

When the switch from Secondary Tax on Companies (STC) to dividends tax took place on 1 April 2012, the legislation allowed a transition period for companies to pass on existing STC credits.  This transition period comes to an end on 31 March 2015.  Unused STC credits will have no benefit after 31 March 2015 and this could have a negative impact on dividend returns.

On the positive side, after-tax returns received by investors in the Sanlam Alternative Income Fund (SAIF) should not be affected by this change.

Let me explain…

A BRIEF BACKGROUND

Under the STC regime, companies declaring dividends were liable for STC on those dividends. When a company received more dividends than it paid to its shareholders, an STC credit was created and could be used to reduce STC payable on future dividend declarations.

Under the new dividends tax regime, dividend-declaring companies must withhold dividends tax on behalf of shareholders and pay it over to SARS.  South African companies receiving dividends are exempt from dividends tax, provided that they supply a declaration of exemption.

During the transition period, it could happen that STC is paid and dividends tax withheld on the same dividend.  To avoid double taxation, SARS is allowing for STC credits (that existed on 1 April 2012) to reduce the dividends tax liability for shareholders who receive dividends.

THE IMPACT ON UNIT TRUST FUNDS

After 1 April 2015, STC can no longer be used to reduce dividends tax for investors and returns on unit trust funds that distribute dividends could be negatively impacted.

Dividends received by natural persons will be taxed at 15% without the benefit of any STC credits.

Companies receiving dividends will no longer be able to use STC credits to reduce the dividends tax liability of its shareholders on dividends distributed to them.

HERE’S THE GOOD NEWS FOR INVESTORS IN SAIF

SAIF is one of the largest investors in vanilla preference shares (prefs) in South Africa.  Typically, vanilla pref agreements make provision for changes in law.  STC being replaced by dividends tax constitutes a change in law.  The agreements between SAIF and issuers of vanilla prefs require the issuers to increase their dividends to compensate SAIF unit holders for the negative impact on their returns due to the end of STC credits.  This means that investors in SAIF will continue to receive a similar after-tax return after 1 April 2015.

For more than 30 years, redeemable prefs have been issued by banks and highly rated institutions.  The issuers use the proceeds to provide funding for share purchase transactions, which in turn stimulates economic growth in South Africa.  These preference shares are known as vanilla prefs.  Investors in vanilla prefs are typically companies, unit trust funds and high net worth individuals.

A WORD OF ADVICE TO COMPANIES

Although dividend income funds will continue to distribute STC credits right up until 31 March 2015, please be sure to declare your dividends to shareholders by 31 March 2015 in order for them to utilise the benefits before they fall away.

Please leave a comment below if you have any queries.

Wayne Liebenberg

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