Dividend tax relief on cards in Budget

If there is a tax cut for individual taxpayers in the upcoming National Budget speech it will not be much.

For many it will not even cover the additional tax caused by the changes made to the taxation of medical aid and group life benefits, from March 1 2012.

If there is a tax opportunity lurking it is contained in the new legislation concerning the taxation of dividends.

It would cause a sensation if Finance Minister Pravin Gordhan announced a multibillion-rand incentive for retirement savings. This happened last year with the announcement of the implementation of dividend tax (DT) to replace secondary tax on companies (STC) on April 1 2012.

STC is levied at 10% on dividend distributions and makes little distinction between types of shareholders. Not even pension, provident and retirement funds are exempt from STC. DT grants a complete exemption on cash dividends for retirement funds. The difference is vast. If an individual taxpayer invests in a collective investment scheme (CIS or unit trust) then the interest income is fully taxable if it exceeds the basic interest abatement. DT is payable at 10% on the dividend income. And capital gains tax (CGT) may be payable at up to 10% on the sale profit.

The CIS investment is made out of after-tax income. And if the taxpayer dies the market value of the CIS is subject to estate duty. But invest in a CIS through a retirement fund and the income is exempt from income tax, dividend tax and CGT. The investment qualifies for a tax deduction, a discount worth up to 40%. And if the taxpayer dies, the retirement fund value is exempt from estate duty.

The amendment will slash tax receipts from dividends by about R5-billion a year. It is the biggest stimulus the retirement industry has received since retirement funds tax was abolished.

But that’s not all. From March 1, investors will enjoy the new dispensation on the taxation of foreign dividends. In the past foreign dividends were fully taxable, subject to a basic exemption of a paltry R3700 a year. The new methodology for taxation of foreign dividends can get complex. But it is subject to an override that foreign dividends can only be taxed to a maximum rate of 10%.

With interest rates forecast to remain low it makes sense to maximise opportunities available on dividend income – and be invested in equity markets when happier economic times return.

Originally published in the Sunday Times Tax Talk column.


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