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02 Mar 2012 16:08
The introduction of a 15% dividend withholding tax, combined with a 33.3% increase in capital gains tax, appears to have been a last-minute grab for revenue to fund the government’s ambitious infrastructure plans.
The dividend withholding tax came as a shock to all investors earning dividends, despite the treasury’s claims that it should have been expected.
The rate came in 50% higher than market expectations and there was very little warning in previous budgets about an increase.
If one looks at the revenue projections in the medium-term budget policy statement in October 2011, it was clear that at that stage the dividend tax was expected to be in line with the 10% secondary tax on companies it was replacing.
Although Finance Minister Pravin Gordhan has dismissed concerns about these rates, stating that they were not as high as other countries, it is the lack of warning and the quantum of the increase that is the issue.
The treasury should have warned investors in the medium-term budget that these taxes were increasing and that they would be phased in over two or three years to allow for financial planning.
These taxes do not affect only “the rich”. Take my mother as a case in point: she is a 73-year-old widow and receives around R5000 a month from my late father’s pension. She supplements this with income from a share portfolio—a grand total of R7000 a month. The portfolio is structured to produce income and also provide an inflation hedge through investments in growth assets. Therefore, the income she earns is a mixture of interest and dividends.
We are still to do the tax calculation, but what we do know is that she will pay 50% more tax on her dividend income than expected—a substantial increase for a pensioner already facing an inflation rate higher than the national average because of rising medical and transport costs, as well as raised electricity prices.
Perhaps because the national treasury deems dividend tax to affect only the “rich” it has, in this budget, not given any tax exemption threshold as is the case for example with interest income, which leaves my mother very little room to manoeuvre.
There are many pensioners who will be affected, as well as housewives who did not save into retirement vehicles as there was no tax benefit.
There are also many pensioners who find their retirement funds insufficient and will be forced to sell their properties to create capital to provide an income in a discretionary investment vehicle. There are few pensioners who survive on their pension alone and who do not supplement their meagre incomes outside of a retirement structure.
For those who have saved within a retirement vehicle the move from secondary tax on companies to dividend tax will create a financial boost because the companies will pass on the tax saving to the investor who will not be taxed within the structure, effectively boosting their dividend income by 10%.
However, this benefit to retirement funds is little solace to the many pensioners surviving on income derived outside of such a structure, many of whom are women. Perhaps this is one of those “unintended” consequences and the treasury will, on reflection, at least afford some relief to those pensioners receiving modest incomes from their investments.
Relief for pension funds
Many black empowerment schemes were structured so that the dividends received would pay off the loans used to buy shares in the company. For example, in the case of the MTN Zakhele deal, Zakhele borrowed the R66 a share that is repaid by the dividend earned.
Hylton Cameron, executive tax manager at Grant Thornton, said that because most of these deals were done within a company structure they would be exempt from dividend tax. Participants could benefit if the company passes on the benefit from the removal of the secondary tax on companies.
Preference shares are used by investors for income generation. It was originally understood that companies would increase the dividend by 10% to offset the change from secondary tax on companies to a dividend withholding tax. However, it is now unclear whether those that have issued preference shares will increase the dividend payment by 15%.
Because all retirement funds are exempt from dividend tax, the full benefit of the conversion from secondary tax on companies to dividend tax will be passed on to its members. Rowan Burger, head of retirement reform at Liberty, said over 40 years this would boost the total return within the typical retirement fund by an estimated 8%.—Maya Fisher-French
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