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Thursday, November 1, 2007
Wider scope

The draft Revenue Laws Amendment Bill 2007 proposes significant amendments to the secondary tax on companies (STC).. These involve an expansion as to the scope of distributions that will be subject to STC and a reduction in the rate, from 12.5% to 10%.

Explains Tim Desmond, Director - Tax and Commercial Departments, Garlicke & Bousfield Inc, “STC is currently an obligation of a company declaring a dividend. In the 2007 Budget Speech, it was announced that it would be replaced with a shareholder level tax, but that the base broadening and rate reduction would be an interim step.”
The former is to be achieved by way of amendments to the definition of the term “dividend” in section 1 of the Income Tax Act, so that all distributions of profits will fall within the definition. The future removal of any reference to the concept of profits, in order to further broaden the STC base, is apparently being considered.
He says it is currently the case that liquidation dividends of pre-2001 capital profits are excluded from the definition of dividend, but that this exclusion will be removed, effective in respect of dividends declared on or after 1st January 2009. The other amendments will be effective in respect of dividends declared on or after 1st October 2007.
Dividends declared within a group of companies (requiring a 70% shareholder connection) are exempt from STC. The rationale is that the relevant profits will be subject to STC only when they leave the group of companies. The scope of this exemption is to be narrowed by limiting those companies that will form a ‘group of companies.’. Dividends declared to companies falling fully or partially outside of the tax net will no longer be exempt from STC. The shares counting towards the 70% requirement will also be limited. Shares held as trading stock or that are the subject of options will not qualify.
There is currently a requirement, in order to access the above intra-group STC relief, that a dividend be derived from profits earned while the relevant companies were part of the same group of companies. This requirement created practical difficulties and is to be removed. Anti-avoidance provisions are being introduced to prevent abuse of this removal.

Copyright © Insurance Times and Investments® Vol:20.10 1st November, 2007
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