Just who will dividend taxes affect?

CAPE TOWN- Investors are in a flutter following the announcement last week that the dividend withholding tax, which replaces the secondary tax on companies as of April this year will be introduced at 15% rather than the expected 10%.

The effect of this tax will ripple through the investment industry, impacting not just the holders of ordinary and preferential shares, but also investors in exchange traded funds (ETFs) such as the Satrix 40 and Satrix divi, and investors in retirement annuities and other long term savings policies which are exempt from the tax.

For a start companies like Truworths, Woolworths and Shoprite delayed the announcement of their dividend until after April.

This could have an impact on some elderly shareholders in those companies who depend on dividends as a form of income.

The delay benefits the companies concerned. ôWe will pay less tax,ö says Woolworths CFO Norman Thomson, ôwhich will push up our after tax profitsö.

In the past companies paid secondary tax on companies (STC) which was levied on the dividend to be paid out. In Woolworths case this amounted to about R90m û assuming that it pays about R900m in annual dividends. In future the tax on the dividend will not be paid by the company but by the individual shareholder. This payment will be administered by the financial intermediary, in most cases a broker.

ôWe will add the tax savings back into the dividend pot so the investor emerges in a similar position,ö adds Thomson.

This will have the effect of reducing dividend cover and could improve the dividend yield û though Thomson wouldnÆt speculate on this.

The addition to the dividend is unlikely to fully compensate for the tax û unless companies top-up their dividend pay-outs – a number of shareholders will actually benefit from the tax changes.

Almost 80% of Woolworths shareholders are exempt from paying the dividend tax. ThatÆs because pension funds are exempt from the tax. Instead pensioners are taxed when they withdraw their savings from the policy.

Also foreign investors can claim relief from taxation on dividends in terms of double taxation agreements if the dividend is also subject to tax in the foreign country. Under the STC system foreign investors could not escape the tax and so faced double taxation.

This was the motivation behind TruworthsÆ delayed dividend announcement. ôTwo thirds of our shareholders are foreigners. They have never liked or understood STC so we wanted to get them onto a system they understood as soon as possible,ö says CFO Mark Sardi.

FirstRand and AECI made the decision to announce the dividend ahead of the April deadline. This means the companies will incur the STC, allowing shareholders to avoid the dividend withholding tax for one last time.

ôOur decision was based on the fact that we have sufficient STC credits to shelter some or all of the dividend payment,ö says FirstRand CFO Johan Burger. ôWe want to utilise them so that the full dividend ends up in the shareholders hands.ö

STC credits are notched up when a holding company is paid dividends by a subsidiary (on which tax has been levied) but the holding company does not pay all of those dividends out to shareholders.

Companies have been given three years to use their tax credits û or lose them.

When AECI made the decision to announce the dividend and pay the STC, CFO Mark Kathan was under the impression the dividend tax would remain at 10%. ôWith hindsight we believe the decision to pay the STC was the correct one û it will benefit our individual shareholders.ö

Like FirstRand, AECI has some tax credits available which did influence the decision.

This week Bidvest announced an ordinary interim cash dividend of 280c a share, along with a special dividend of 80c a share. This was in relation to the profit made on the Mumbai airport transaction.

However Abri du Plessis, CEO Gryphon Asset Management believes that the decision to pay the special dividend was also motivated by BidvestÆs outstanding STC credits. Some large companies like Bidvest, and Remgro have huge tax credits which can be set off against the tax liability, he says. ôWe expect to see a number of special dividends in the next three years.ö

The bigger question Kathan says, is what will companies do going forward?  ôWe will recalculate our dividend cover which will see us paying additional dividends to shareholders.ö But whether AECI will fully compensate its shareholders for the additional 5% tax remains to be seen. ôOur job is to look after shareholders, but also to grow the company,ö Kathan says. ôWe have plans to expand offshore and cash flow will be important in that regard.ö

While the likes of AECI, Woolworths and other local companies are expected to recalculate their dividend cover to ensure that shareholders are not too out of pocket, other companies will pocket the savings.

ôI donÆt believe that we will see the likes of British American Tobacco changing its dividend cover to please the 12% of shareholders that are South African,ö says Du Plessis.

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