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STC CREDIT – USE IT OR LOSE IT

Grant Ward

Dividends tax was introduced into the South African tax regime on 1 April 2012 and replaced secondary tax on companies (STC). STC was levied on dividends distributed by companies at the flat rate of ten percent. In terms of the dividends tax regime, a 15% tax is levied on the amount of any dividend paid by a company. The company is liable to withhold the amount of the tax in respect of cash dividends and pay it over to the South African Revenue Service (SARS).

In terms of section 64J(2) of the Income Tax Act (the Act) companies were required to calculate the STC credit as at 31 March 2012 (the day before dividends tax came into effect) and were allowed to carry forward the credit into the Dividends Tax regime. An STC credit of a company is applied to reduce the amount of a dividend that is potentially subject to dividends tax. The reason for this treatment of STC credits was to prevent double taxation of the excess net accrued dividends of a company that had already been subject to STC, however there is a three year expiry period. Therefore, with effect from 1 April 2015, STC credits will expire. It is therefore recommended that companies with STC credits pay any outstanding dividends to shareholders before 31 March 2015 in order to utilise any STC credit before the expiry thereof.

In order to avoid confusion on the utilisation of STC credits, SARS has issued a draft binding general ruling with the subject “Termination of STC credits: dividend declared before 1 April 2015 but paid on or after that date”.  In this document, SARS clarifies that STC credits are NOT available when a dividend is declared before 1 April 2015 but is paid on or after that date.

Please note, the utilisation of STC credits is subject to the notification by the company declaring the dividend of the amount by which the dividend reduces the STC credit of the company. STC credits used by the company must be apportioned between all shareholders receiving a dividend from the company by taking into account the ratio between the total reduction in the STC credit and the total dividend paid to all shareholders. This ensures that any particular shareholder does not unduly benefit from a company’s STC credit by setting off a disproportionate share of the company’s entire STC credit against its liability for dividends tax, with the effect of prejudicing the company’s other shareholders.

In terms of section 64J(7) of the Act, in the event that a company neglects to withhold dividends tax from a dividend paid to a person as a result of an inaccurate notification by the company, the company itself will be liable for the amount of dividends tax.