The effect of the 2017 amendments, was that exempt dividends that arise in the manner above could now constitute extraordinary dividends, if the resident shareholder company sells the shares in respect of which it received the dividends, within 18 months of receiving the dividends. To the extent that the exempt dividends constitute extraordinary dividends, as defined in s22B of the Act and in paragraph 43A of the Eighth Schedule to the Act, such dividends are treated as income or proceeds received from the disposal of those shares. Furthermore, amendments were also made so that the corporate re-organisation rules in the Act were made subject to these anti-avoidance rules dealing with dividend stripping.
Reasons for change
The Memorandum notes that it has come to Government’s attention that the 2017 amendments providing that the anti-avoidance rules on dividend stripping override the corporate re-organisation rules, may affect some legitimate transactions. Considering this, a number of amendments have been proposed.
Corporate re-organisation rules no longer overridden
To ensure that the anti-avoidance rules dealing with dividend stripping do not affect legitimate transactions, National Treasury proposes that these rules should no longer override the corporate re-organisation rules. Instead, it proposes that these anti-avoidance rules should only be triggered when the corporate re-organisation rules are abused by taxpayers who use the corporate re-organisation rules to subsequently dispose of their shares to unrelated purchasers, outside the realm of the re-organisation rules.
Introduction of the “deferral transaction” and application of the anti-avoidance rules on dividend stripping
To address instances where taxpayers use the corporate re-organisation rules to subsequently dispose of their shares to unrelated purchasers outside of the realm of the re-organisation rules, amendments are proposed to clarify the timing of the trigger of the anti-avoidance rules dealing with dividend stripping. To achieve this, it is proposed that the term “deferral transaction” is introduced under the anti-avoidance rules dealing with dividend stripping, which will be defined to mean transactions in respect of which the corporate re-organisation provisions in the Act will apply.
Where a disposal does not take place in terms of a deferral transaction and a resident company received an extraordinary dividend within 18 months of that disposal or as a consequence of that disposal, the extraordinary dividend amount must be added to the income or proceeds from the disposal in the year of assessment of the disposal. However, if the dividend that qualifies as an extraordinary dividend is received by or accrues to the resident company in a subsequent year of assessment, it must be taken into account to determine the resident company’s tax liability in that subsequent year of assessment.
As stated above, where a resident company disposes of shares it holds in another company in terms of a deferral transaction, the anti-avoidance rules dealing with dividend stripping will not be immediately triggered. However, the Memorandum states that specific claw-back rules should apply to exempt dividends received or accrued in respect of those shares or other shares acquired in exchange for those shares in respect of which such exempt dividends were received or accrued within 18 months of their acquisition. The purpose is for these claw-back rules to apply at the time when such shares are subsequently disposed of in terms of a transaction that is not a deferral transaction, within 18 months of their acquisition. Without going into detail, the Memorandum sets out two scenarios here:
- Scenario 1: Where exempt dividends were received by or accrued to a resident company in respect of certain shares, 18 months prior to a deferral transaction and those shares are disposed of to another resident company in terms of the deferral transaction: If these companies were connected persons immediately after the deferral transaction and the other resident company disposes of the shares within 18 months thereafter, outside of a deferral transaction, the other resident company is deemed to have received or accrued the exempt dividends that were received by or accrued to the resident company from these shares.
- Scenario 2: Where exempt dividends are received by or accrued to a resident company in respect of certain shares, 18 months prior to the deferral transaction and a company acquires other shares in exchange for shares disposed of in terms of the deferral transaction: If a company disposes of the other shares within 18 months of the deferral transaction, the exempt dividends that were previously received by or accrued to the resident company for shares disposed of under the deferral transaction, are deemed to be received by or accrued to that company.
The proposed claw-back rules only apply for the purposes of determining whether the anti-avoidance rules on dividend stripping apply to the subsequent deferral transaction.
Other proposals regarding the anti-avoidance rules that apply to dividend stripping
In addition to the above, the Memorandum states that there are proposals to prevent connected persons that form part of the same group of companies to use deferral transactions to split exempt dividends among themselves. The purpose of splitting the exempt dividend is to ensure that no one connected person or a group company receives an extraordinary dividend. Finally, there is also a proposal to prevent taxpayers from stripping the value of a company after entering into a deferral transaction and avoid the application of the extraordinary dividend by using a company with high value shares to on distribute an exempt dividend.