LU11 – STC AND DIVIDENDS WITHHOLDING TAX
SECONDARY TAX ON COMPANIES (STC)
Secondary Tax on Companies (STC) came to an end on 31 March 2012. It was replaced by dividends tax. STC was dealt with in
S64B and S64C of the Income Tax Act and had been in effect for all dividends distributed from 17 March 1993 onwards. The rate
had gone through many changes during its years in effect, but the applicable rate at the date of its demise was 10%. This tax was
payable by any South African resident company (CCs would fall in this category) declaring a dividend, and was payable on net
dividends declared – i.e. dividends declared by a company less dividends accrued to a company in any given STC cycle. A
dividend cycle ended on the date a dividend declared accrued to a shareholder and a new cycle started on the day after this
date. The Act dealt with various deemed dividend declarations (i.e. where a dividend would be deemed to be declared for STC
purposes) as well as exemptions for certain dividends from STC.
A company declaring a dividend would need to take into account the STC liability that arose from this dividend. Therefore, if a
company had R 55 000 of retained income available for distribution, it would only be able to declare a dividend of R 50 000 (R 55
000 × 100/110). The remaining R 5 000 would have been used to pay the STC liability.
PAYMENT OF STC
STC had to be paid by the last day of the month following that in which the dividend accrued to the shareholders e.g. if a
dividend accrued to shareholders on 15 May 2011, the STC on net dividends in this cycle would be payable on 30 June 2011.
Payment had to be accompanied by a completed IT56 return. If payment was not made within the set period then a penalty of
10% on the outstanding STC was levied and interest was charged at the prescribed rate on the outstanding amount.
Since STC came to an end on 31 March 2012, this was the last date on which STC would apply to a dividend declaration.
Therefore, final STC payments on a 31 March 2012 dividend would have to have been made by 30 April 2012. Effective from 1
April 2012 the new dividends withholding tax applies.
DIVIDENDS WITHHOLDING TAX (DWT)
Dividends withholding tax came into effect on 1 April 2012 and is dealt with by S64D to S64L of the Income Tax Act. This tax is
levied at a rate of 20% (prior to 22 February 2017: 15%) on certain dividends paid by a company that is resident in South Africa.
However, unlike STC, dividends tax is borne by the shareholder and not the company. Although the tax is borne by the
shareholder, it is withheld by the company, which then pays this over to SARS. The different effect of the two taxes is best
illustrated by an example:
SEE EXAMPLE 11.1
DO QUESTION 11.1
TRANSITIONAL EXEMPTION – S64J
The Act states that any dividend declared before the effective date – i.e. 1 April 2012 – will be exempt from dividends tax
because it will already have been subject to STC. This section prevents a dividend which is declared before 1 April 2012 and paid
after 1 April 2012 from being caught in the net of both STC and DWT.
NEW DEFINITION OF DIVIDEND
‘Dividend’ for the purposes of dividends tax means any amount transferred or applied by a company that is a resident for the
benefit or on behalf of any person in respect of any share in that company to the extent that the amount transferred:
a) Does not result in the reduction of the company's 'contributed tax capital' – i.e. pure share capital (this excludes
amounts transferred from a company’s reserves to its share capital account); and
b) Does not constitute an issue of shares or capitalisation shares in that company.
SECONDARY TAX ON COMPANIES (STC)
Secondary Tax on Companies (STC) came to an end on 31 March 2012. It was replaced by dividends tax. STC was dealt with in
S64B and S64C of the Income Tax Act and had been in effect for all dividends distributed from 17 March 1993 onwards. The rate
had gone through many changes during its years in effect, but the applicable rate at the date of its demise was 10%. This tax was
payable by any South African resident company (CCs would fall in this category) declaring a dividend, and was payable on net
dividends declared – i.e. dividends declared by a company less dividends accrued to a company in any given STC cycle. A
dividend cycle ended on the date a dividend declared accrued to a shareholder and a new cycle started on the day after this
date. The Act dealt with various deemed dividend declarations (i.e. where a dividend would be deemed to be declared for STC
purposes) as well as exemptions for certain dividends from STC.
A company declaring a dividend would need to take into account the STC liability that arose from this dividend. Therefore, if a
company had R 55 000 of retained income available for distribution, it would only be able to declare a dividend of R 50 000 (R 55
000 × 100/110). The remaining R 5 000 would have been used to pay the STC liability.
PAYMENT OF STC
STC had to be paid by the last day of the month following that in which the dividend accrued to the shareholders e.g. if a
dividend accrued to shareholders on 15 May 2011, the STC on net dividends in this cycle would be payable on 30 June 2011.
Payment had to be accompanied by a completed IT56 return. If payment was not made within the set period then a penalty of
10% on the outstanding STC was levied and interest was charged at the prescribed rate on the outstanding amount.
Since STC came to an end on 31 March 2012, this was the last date on which STC would apply to a dividend declaration.
Therefore, final STC payments on a 31 March 2012 dividend would have to have been made by 30 April 2012. Effective from 1
April 2012 the new dividends withholding tax applies.
DIVIDENDS WITHHOLDING TAX (DWT)
Dividends withholding tax came into effect on 1 April 2012 and is dealt with by S64D to S64L of the Income Tax Act. This tax is
levied at a rate of 20% (prior to 22 February 2017: 15%) on certain dividends paid by a company that is resident in South Africa.
However, unlike STC, dividends tax is borne by the shareholder and not the company. Although the tax is borne by the
shareholder, it is withheld by the company, which then pays this over to SARS. The different effect of the two taxes is best
illustrated by an example:
SEE EXAMPLE 11.1
DO QUESTION 11.1
TRANSITIONAL EXEMPTION – S64J
The Act states that any dividend declared before the effective date – i.e. 1 April 2012 – will be exempt from dividends tax
because it will already have been subject to STC. This section prevents a dividend which is declared before 1 April 2012 and paid
after 1 April 2012 from being caught in the net of both STC and DWT.
NEW DEFINITION OF DIVIDEND
‘Dividend’ for the purposes of dividends tax means any amount transferred or applied by a company that is a resident for the
benefit or on behalf of any person in respect of any share in that company to the extent that the amount transferred:
a) Does not result in the reduction of the company's 'contributed tax capital' – i.e. pure share capital (this excludes
amounts transferred from a company’s reserves to its share capital account); and
b) Does not constitute an issue of shares or capitalisation shares in that company.
