On 20 February 2019, Finance Minister Tito Mboweni announced new anti-dividend stripping tax avoidance provisions relating to ‘disguised sales’, which is intended to address perceived abuse of the dividend stripping provisions that were enacted in 2017.
The ‘abusive arrangements’ are described to involve a target company distributing a substantial dividend to its current company shareholder and subsequently issuing shares to a third party. The current anti-dividend stripping provisions apply only where the current shareholder disposes of shares in the target company within a certain period and not also where the current shareholder is being diluted.
It is proposed that the current anti-dividend stripping rules be amended with effect from 20 February 2019. This could pose risks that taxpayers need to be aware of, as outlined below.
We currently have no clarity on the detailed wording. It is anticipated that the first draft wording will only be available mid-July, and the final version by the end of October 2019.
This creates substantial uncertainty when entering into transactions with certain characteristics, as set out below.
Other similar tax avoidance provisions consider transactions within a 12 or 18 month period of each other. In the circumstances, and until the actual detailed wording is known, it will be risky to declare substantial dividends from a company that either has issued shares in the last 18 months, or anticipates issuing shares within the next 18 months.
Similarly, it will be risky to issue shares from a company that either has declared substantial dividends in the last 18 months, or anticipates declaring substantial dividends in the next 18 months.
In essence, the risk is that the current shareholder may be liable to pay capital gains tax (CGT) (currently at a rate of 22.4% for corporates) on up to the whole of the dividend, or the whole of the subscription price.
Accordingly, we strongly suggest that a SA company considering entering into a transaction which includes (1) a significant proposed dividend distribution; and/or (2) an issue of shares, seeks tax advice to consider the risk in respect of the imposition of CGT and potentially also penalties and interest.