Dividends paid not deductible for income tax

[J7J]

Hi,

I am trying to find something to send to a client to support my view that dividends are not deductible for income tax purposes (ie. you can not deduct dividends to arrive at your net profit before tax figure).

The client's bookkeeper thinks that the dividends are deductible (and deducted this when she did her provisional tax calculation), but the client and I agreed that it is not deductible. I am trying to find some literature to support this view. I have done a google search, looked on SARS' website etc. The results I get confirm that it is not deductible, but I can not find something substantial to send to the client.

Any advice?

Thanks!

[CLIVE-TRIANGLE]

Aish, perhaps a slap on the ear??

You can explain it by saying that dividends do not even belong in the Income Statement; they belong in the Statement Of Changes In Equity, as it is a transfer from distributable reserves to shareholders.

The correct entries for dividends are:
Debit retained earnings, credit creditors for dividends (when declared), and
Debit creditors for dividends, credit bank (when paid).

I don't see any expense there, and nor should she?

[Dave A]

You have my sympathy. I've been having a running battle that's been going on for over two years with the bookkeeper of a debtor who has absolutely no method when it comes to capturing and paying their creditors accounts. It's a JSE listed company too

Stubborn, obstinate, uncooperative, unteachable, argumentative and wrong!

Perhaps you could point out that dividends are not an expense incurred in the generation of income.
It is only a distribution out of (after tax) profits. Whether you pay it or not does not affect the gross income of the business.

Maybe then the bookkeeper will get it.

[BusFact]

The literature would be found in an Accounts 101 textbook. Its pretty fundamental stuff. I think you'd struggle to find a specific extract though, it would more likely be covered in separate areas - seeing that they are different parts of the accounting pie.

Its a bit like asking to substantiate why liabilities can't be a tax deductible expense.

[dfsa]

Aish, perhaps a slap on the ear??

Eishh, where is the accountant that the "Bookkeeper" report to? They both need a slap. That bookkeeper need to go back to school.

[dellatjie]

Haha! I had a similar problem a few years ago, with a client insisting that if salaries cannot be deducted from his output tax, he is paying VAT on salaries!

First I tried to argue with him ( in a diplomatic way of course), when that didn't work, I sent him the Vat guide for vendors to study, don't think he ever did that. Our last resort was a meeting with the partner and 2 senior managers, explaining on a white board (this is serious stuff, this guy wanted to take us to court 'cause we were stealing his money!). Even that ended up in a screaming battle from the client's side. They just ended up not paying their account, after which we suspended services...

[J7J]

Hi all.

Thank you for all your responses. I have left it in the client's hands to discuss this with his bookkeeper.

[Feyisara Sorinola]

Hi Dave,

With regards to your answer above, it means that the retained earning had been taxed at 28% and this get taxed further in the hands of the business owner (Individual) at 15%, when dividend is paid totalling 43%. Is there a way of paying the shareholders out of the retained earnings / distributing profits without incurring this much Tax. Please Advise. Thank you.

[CLIVE-TRIANGLE]

Hi, it's actually 38.8%. Still high but substantially less than 43%.

The 15% is on 72% of taxable profit. By that I mean the 28% is first deducted, then 15% from what remains.

To answer your question; no there is no way that it can be legally done.

[Feyisara Sorinola]

okay thank you.

[Beancounter]

I think causing a loss for the year is a way to get the retained earnings out of the company by declaring salaries to the directors / members and avoiding dividends tax. Just keep in mind that the directors / members will be taxed on those salaries. Do a scenario analysis first to see what the optimum tax structure will be.