Section 64E(1) of the South African Income Tax Act, 1962 (the “Act”) provides that dividends tax must be levied at a rate of 20% of the amount of any dividend paid by any company, other than a headquarter company. In terms of section 64EA(a) of the Act, the beneficial owner of a cash dividend is liable for dividends tax in respect of that dividend. However, in terms of section 64F(1), a cash dividend is exempt from dividends tax in various instances. Despite these exemptions, section 64G(1) provides that, subject to section 64G(2) and (3), a company that declares and pays a cash dividend must withhold dividends tax from that payment. Section 64G(2)(a) provides that a company must not withhold any dividends tax from the payment of a dividend if the person to whom payment is made has (1) by a date determined by the company or (2) if no date has been determined by the company, by the date of payment, submitted to the company:
- the prescribed declaration by the beneficial owner that the dividend is exempt from dividends tax; and
- a written undertaking should be made to inform the company, in writing, should the circumstances affecting the exemption applicable to the beneficial owner change or should the beneficial owner cease to be the beneficial owner.
The “group of companies” exemption from withholding in terms of section 64G(2)(b) of the Act is not discussed for purposes of this article. The discussion below relates to dividends declared by unlisted companies to beneficial owners who/which do not form part of the same group of companies. For dividends tax purposes, a cash dividend declared by an unlisted company is deemed to be paid on the earlier of the date on which the dividend is paid or becomes “due and payable” in terms of section 64E(2)(a)(ii). It is therefore important to determine the date by which a dividend declared becomes “due and payable” as this would be the date by which the beneficial owner of such dividend must submit the requisite declarations and undertakings evidencing that the dividend is exempt from dividends tax if this date precedes the date on which the dividend is settled. For example, despite the fact that a public benefit organisation (“PBO”) may be approved by the Commissioner in terms of section 30(3) of the Act (and that cash dividends to such entity should therefore be exempt from tax), if the PBO does not provide the company declaring the dividend with the requisite declarations and undertakings on a timeous basis, the company must withhold dividends tax and the PBO would have to rely on section 64L to claim a refund of the dividends tax paid. As the phrase “due and payable” is not defined in the Act, regard must be had to the ordinary meaning thereof, informed by case law and commentary thereon.
Our courts have considered the meaning of “due” and “payable” on a number of occasions. In Rhodesia Newspapers Company Ltd v Allison, the court stated the following as regards the meaning of “due”: “The word ‘due’ is capable of two interpretations – it may, dependent upon the context in which it is used, mean ‘payable’, or it may mean ‘owing’ irrespective of whether it is immediately payable.” In considering an attachment under a garnishee order of “so much of the debt due” as provided for in the relevant legislation, Innes CJ (as he was then) stated the following in White v Municipal Council of Potchefstroom: “I give to the words ‘the debt due’ their ordinary meaning. The garnishee must be under an obligation to pay the judgment debtor…”
These statements echo the meaning given to “due” in the Oxford Online Dictionary, where it is stated as denoting, inter alia, “(of a thing) required or owed as a legal or moral obligation”.
The draft Comprehensive Guide to Dividends Tax (Issue 2) issued by the South African Revenue Service (the “Guide”), released for comment on 27 July 2017, states the following on page 58 as regards the meaning of “due and payable” in section 64E(2)(a)(ii): “The declaration of a dividend creates a debt owing to a holder of share. Such a debt arises out of a formal act performed by a company. A dividend declared by a company that is not listed is generally due on the date which it is declared.” As regards the meaning of “payable”, the court in Schenk v Schenk, stated the following: “For ‘payable’ can have at least two different connotations: (a) that which is due and must be paid, or (b) that which may be paid or may have to be paid…The sense of (a) is a present liability – due and payable –…(b) is a future or contingent liability…” On page 59 of the Guide, the following is noted as to the meaning of “payable”: “It has been held that the word ‘payable’ can have different meanings. In CIR v Janke Stratford J quoted the judgment of Searle J Stafford v registrar of Deeds: ‘It is clear that the word payable is sometimes construed as meaning ‘payable at a future time’ or ‘in respect of which there is a liability to pay’…it is sometimes used to mean ‘payable immediately’ or actually due and presently demandable… An amount will be payable only when the time for payment arrives. For an amount to be ‘due and payable’ the amount must not only be owing, but a person must have the right to claim payment to it.” (our emphasis included) In summary, to avoid dividends tax being withheld from an exempt dividend, the beneficial owner of a dividend must submit the requisite declaration and undertaking to the company declaring such dividend by the date on which the company has an unconditional obligation to make payment of such dividend and the beneficial owner has a corresponding right to claim payment of the dividend, irrespective of the fact that actual payment of the dividend may only occur sometime thereafter.