BCOM: ACCOUNTING

MODULE: TAXATION 3A
 TAXATION 3A

Unit 6:
Taxation of companies &
company distributions
 TAXATION 3A
Unit outcomes
- Demonstrate a thorough understanding of the nature of a company
and its tax implications
- Demonstrate a thorough understanding of SBC’s
- Calculate the tax implications of a company’s distributions and
dividends tax
 TAXATION 3A
Introduction
• A company is a separate entity with a legal personality, it is an entity in which
business activities occur and are regulated in.
• A company is a fictitious separate person or entity that has been clothed
with a legal personality. For income tax purposes, a company is also
treated as a separate person and a separate tax calculation must be
prepared for the company and one for its owners (shareholders) and
managers (directors).
• If one has specifically decided upon a company or close corporation (CC) as
a form of enterprise.
 TAXATION 3A
The nature of a company
• A company is every association of persons governed by any law in the
Republic but specifically excludes any foreign partnership.

• Companies and close corporations are governed by the Companies Act

and Close Corporations Act respectively.

• A close corporation is treated the same way as a private company in

terms of income tax purposes.
 TAXATION 3A
Low-interest and interest-free loans to companies
• Section 7C was promulgated as an anti-avoidance provision in respect of
schemes that wealthy individuals attempt to reduce their potential estate
duty exposure by selling assets to a trust on a loan account that carries low
interest rate than the official interest rate.

• In terms of section 7C, the shortfall in the interest rate is a deemed

donation in the hands of a natural person who provides the low interest
loan.

• The deemed donation also applies if natural person provides a low or free
interest loan to a company. However, for section 7C to be triggered, a trust
that is a connected person in relation to that natural person must hold at
least 20% of the equity shares or voting rights in that company.
 TAXATION 3A
Small business corporations (SBC) and personal service
providers
A small business corporation is a type of business where all interest or
shareholders are all natural persons throughout the year of assessment.
Furthermore:

• gross income does not exceed R20 million;

• owners do not hold shares or interest in any other company;
• it is not a personal service provider; and
• not more than 20% of all receipts and accruals (other than those of capital
nature) and all capital gains is from investment income and/or personal
service income.
 TAXATION 3A
Tax implications of a company’s distributions and
dividends tax
A company distributes its profits by means of dividends to its shareholders
(owners). The distribution of dividends to shareholders may result in dividends
tax having to be withheld by the company, on behalf of shareholders at a rate
of 20% on dividends declared by the company.

The payment of a dividend is not deductible for tax purposes since it is not an
expense in the production of income, but merely represents a distribution of
profits to shareholders.

https://www.sars.gov.za/tax-rates/income-tax/companies-trusts-and-small-busi
ness-corporations-sbc/
 TAXATION 3A
Dividends Tax
Definition of a dividend (sections 1 and 64D) A ‘dividend’ is defined
in section 1 of the Act and it means any amount, other than a
distribution of an asset in specie declared and paid as contemplated
in section 31(3), which is 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.
What is a dividend in specie?

ⓘ Start presenting to display the poll results on this slide.

 TAXATION 3A
Levying of dividends tax on a dividend paid in cash
Dividends tax of 20% is imposed on the amount of dividends paid by a
resident company to a beneficial owner that is not exempt from dividends
tax.

The beneficial owner is the person entitled to the benefit of the dividend
attached to a share.

The liability for dividends tax falls on the beneficial owner for a cash dividend
paid by a resident company. The company will withhold the dividends tax on
behalf of the beneficial owner and the net amount (dividend declared less 20%
dividends tax) will be paid to the beneficial owner.
 TAXATION 3A
Levying of dividends tax on a dividend in specie
In terms of a distribution in specie (distribution that does not represent cash)
the distributing company is liable to pay the dividends tax, not the beneficial
owner.

A dividend is deemed to have been paid the earlier of the date on which the
dividend is paid or becomes due and payable eg: when announced and
approved by directors.
 TAXATION 3A
Dividends tax for foreign companies
Dividends paid by foreign companies do not attract dividends tax,
unless it is foreign cash dividends paid in respect of JSE listed
shares.
 TAXATION 3A
Exemptions from dividends tax
Where the beneficial owner being a resident company, a listed non-resident
company or a REIT or controlled company (before January 2014), a PBO,
provincial or national government is exempt from dividends tax, to the
extent that it does not consist of a dividend that comprises a distribution of
an asset in specie.

A REIT is a company that owns and typically operates income-producing real

estate or related assets.
 TAXATION 3A
Dividend Calculation (dividend in specie)
Step 1: Establish which beneficial owners are exempt from dividends tax in terms of section 64F
and whether the necessary declarations and undertakings have been received from them.

Step 2: Determine if the amount is a dividend as defined in section 64D for dividends tax purposes, which includes any
amount
contemplated in section 31(3)(i) but excludes:
 shares in the company (for example capitalisation shares);
 contributed tax capital (if applicable); and
 a dividend in specie for foreign companies listed on the JSE.

Step 3: Determine the market value of the asset distributed as a dividend in specie. The market value must be determined
on the date that the dividend is paid or becomes payable unless it is a listed financial instrument, then the value must
be determined as the closing value on the day before the dividend is paid.

Step 4: Multiply the dividend (market value of the distribution) to shareholders (step 3) that are
not exempt by 20%.
 TAXATION 3A
Summary
In this study unit, the tax principles applicable to companies were
examined.
Companies (except small business corporations, personal service
providers and foreign branches) pay tax at a fixed rate and does not
depend on the sliding scale.
The unit also discussed the tax that the companies pay on the dividends
that are distributed to their shareholders.