Extra-ordinary dividends - share buy-back anti-avoidance
27 Mar 2018
Share buy-backs, if structured in a specific manner, may give rise to the shareholder/seller not being liable to capital gains tax in respect of the disposal of the share on the basis that the proceeds derived by the shareholder/seller in respect of such disposal would be reduced by the amount by which such buy-back transaction gives rise to a dividend. In addition, in circumstances where the shareholder/seller is a South African tax resident company, the share buy-back may be free from Dividends Tax.
In order to prevent abuse of the above, anti-tax avoidance measures were introduced in the form of section 22B of the Income Tax Act No. 58 of 1962 (“the Act”) and paragraph 43A of the Eighth Schedule to the Act, which provisions may apply where a shareholder/seller is a company holding a “qualifying interest” in a company at any time during a period of 18 months prior to the disposal of shares in that company.
A “qualifying interest” is defined as an interest held by a company in another company, whether alone or together with a connected person, that constitutes:
- in respect of an unlisted company, 50% of the equity shares or voting rights in that other company or 20% of the equity shares or voting rights in that other company should such company not have a majority shareholder; or
- in respect of a listed company, 10% of the equity shares or voting rights in such company.
Paragraph 43A is applicable should the shares disposed of be held as capital assets. Should paragraph 43A be applicable in respect of the disposal of shares as outlined above, the amount of any “exempt dividend” (broadly speaking a dividend which was exempt from Income Tax and Dividends Tax) received by or accrued to the shareholder/seller in respect of the shares disposed of must, to the extent that such dividend constituted an “extraordinary dividend” be taken into account as part of the proceeds realised by the seller/shareholder from the disposal of the shares, as a result of which a capital gains tax liability may arise.
An “extraordinary dividend” is defined as:
- in relation to a preference share the dividends in respect of which are determined with reference to a rate of interest, so much of the amount of any dividend received or accrued as exceeds an amount determined at a rate of 15%; or
- in relation to a share other than a preference share, so much of the amount of any dividend received or accrued within a period of 18 months prior to the disposal of that share or in respect, by reason or in consequence of that disposal, as exceeds 15% of the higher of the market value of that share as at the beginning of the 18-month period or upon the date of disposal.
Section 22B mirrors the wording of paragraph 43A but applies where the shareholder/seller held the shares disposed of as trading stock. Should section 22B be applicable, the amount of any exempt dividend received by or accrued to such seller/shareholder in respect of the shares disposed of must, to the extent that the dividend constitutes an extraordinary dividend, be included in the income of the shareholder/seller as a result of which an income tax liability may arise.
This new anti-avoidance rule is deemed to have come into effect on 18 July 2017 and applies in respect of any disposal on or after that date other than a disposal in terms of an agreement where a suspensive condition exists and has not been met before 19 July 2017.