Finance Minister, Pravin Gordhan, has had to find creative methods of increasing tax revenue in a very challenging environment.

The hike in the rate of withholding tax on dividends (from 15% to 20%) is just one of the ways of increasing income tax revenue that was announced on 22 February 2017.

In his Budget Speech, Gordhan announced that the new 20% rate of withholding tax on dividends would apply ‘with immediate effect’.  This is confirmed by the draft Rates and Monetary Amounts and Amendment of Revenue Bill (released on the day of the Budget) –  the new rate of 20% is effective from 22 February 2017 and will apply to any dividends paid on or after this date.

Dividend withholding tax is levied on shareholders.  This increase in dividend withholding tax is intended to be an anti-avoidance measure.  With the dividend withholding tax rate now at 20%, taxpayers earning less than R1,5million taxable income per annum are more likely to opt for a salary, rather than choose to receive dividends. In addition, sole proprietors or small and medium-sized enterprises (SMEs) are more likely to retain profits within the company rather than declare dividends.

In cases where dividends were declared on or before 22  February 2017, (the effective date of the rate increase), but where these dividends have not yet paid out to the shareholders, the dividend withholding tax provisions need to be carefully considered in order to determine whether such dividends will be taxable at the higher rate of 20%.

Should you have any concerns regarding how this change in tax legislation may affect you, please contact us for assistance.