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Thread: Dividend Tax - What is the effective rate?

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    Dividend Tax - What is the effective rate?

    For a PTY LTD company, the new dividend withholding tax of 15% is applicable. So if a dividend of R100000 is paid out, then the shareholder will receive R85000. Will the shareholder who is an SA resident, have to pay personal income tax on that R85000 as well?

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    Dividends received by a SA resident is exempt from personal income tax in terms of S10(1)(k) of the income tax act.
    The dividends tax which is withheld by the company and paid over to SARS on your behalf is a separate withholding tax.

    The shareholder would not have to pay personal income tax on the R85 000 dividends (nett of 15% dividends tax) received.

    The effective rate of taxation for dividends tax is the following:
    Company's profits are taxed at 28%, from which the dividends is paid.
    From the remaining after tax profit (100% - 28% income tax = 72%) a 15% dividend withholding tax is paid.
    As a result the effective rate of taxation is 38.8% (28% after tax profit + 10.8% [72%*15%]).

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    davidbann (30-May-13)

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    Lightbulb

    Thanks Mynhardt!

    So just to clarify:
    • If a person (director & shareholder) earns R750000 taxable income per year, that person will be taxed at an effective rate of 30.6% (using tax tables)
    • If we reduce this earning to R650000 then that person will be taxed at an effective rate of 29.2%
    • We then pay a R100000 dividend to that person, which will have an effective tax of 38.8%


    So if my workings are correct:
    • In the case where the person earns a salary of R750000, they pay an effective R229765.00 tax (30.64%)
    • In the case where the person earns a salary of R650000 plus dividends of R100000, they pay an effective R189765.00 income tax (29.19%), plus an effective company and dividend tax of R38800.00 (38.8%), totaling to R228565.00 (30.48%), which in effect saves them R1200.00 (0.16%)


    In this example it isn't really worth the admin effort to pay dividends over salary, right? Of course if we play with the numbers a little, then it might have a different impact, but not anything to brag about. There is also the benefit to the company that it only pays the dividends if it makes a profit, so less risk to the company but more risk to the shareholder, since they might not get the expected payout.

    All of this is of course based on the assumption that the shareholder is a company employee, and that we treat the dividend almost as part of the salary package. It looks like this wouldn't make sense at the end of the day, but just for reference sake...

    I have created a spread sheet to easily show the effective tax rate, so that one can play around with numbers - it will automatically calculate income tax etc. Just enter values in the yellow cells, and the rest will be calculated. It's basic and doesn't take more complexities into account, but it gets the point across...

    Let me know if I missed the boat on this?
    Attached Files Attached Files

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    Thanks for the calculator!

    Something that is not factored in; taxable profit is seldom equal to financial profit, from which dividends are paid, and company taxes are seldom equal to 28% of net profit.

    Secondly, IFRS credits are not taxable, but they can be distributed as dividends.

    I guess what I am trying to say that although the calculator is arithmetically accurate, it does not account for the tax value of the adjustments made to arrive at taxable profit.

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    davidbann, assuming the shareholder/employee has the power to make such decisions (eg. in owner managed companies), it would always be beneficial to pay out dividends instead of salary, once the person's total personal income pushes him into the 40% tax bracket. This benefit, as you saw, is however very little.

    Clive, what do you mean by "IFRS credits"?

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    Mynhardt, I suppose the best illustration is investment property (rental generating). International Financial Reporting Standards requires that all assets be regularly appraised and the that the change be accounted for as income, or the decrease charged to income. These properties generally only increase in value and these revaluation credits are not taxable.

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    Thanks. So basically IFRS adjustments such as fair value adjustments, impairments and amortisation of intangibles, etc.
    Wasn't familiar with the phrase/wording.

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    Yes, that's right. You put it far better than I did

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    Another question on dividends, especially in owner managed businesses....is there a limit on how often you can declare a dividend?

    Assuming you met the solvency and liquidity tests could you declared a dividend every month?

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    AS far as I know, no. Depends on whether the MOI has any prescription, but that's it.

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