Accrual of amount on cession of right to dividends

Accrual of amount on cession of right to dividends

• 06 May 2020
• Corporate Tax
• Ben Strauss

Monday, 11 June 2018

Important:

This article is based on tax law for the tax year ending 28 February 2019.

Author: Ben Strauss (Cliffe Dekker Hofmeyr)

Generally speaking, dividends paid by South African companies are exempt from income tax in the hands of shareholders. The dividends may, however, be subject to dividends tax, subject to certain exemptions.

Dividends are exempt from income tax even if a person receives the dividend by virtue of a cession to that person of the right to receive the dividend. A notable exception to this principle is that, if a shareholder cedes only the right to receive dividends (that is, without transferring the other rights attaching to the underlying shares) to a company, then the dividend accruing to the company is subject to income tax, in terms of paragraph (ee) of the proviso to s10(1)(k) of the Income Tax Act, No 58 of 1962.

However, what are the tax implications of the right to receive a dividend in the hands of the cessionary (that is, the person to whom the right is ceded)?

That question was the subject matter in the case of CSARS v KWJ Investments Service (Pty) Ltd (142/2017) [2018] ZASCA 81 (31 May 2018).

The facts of the case were relatively complex. Put simply, the taxpayer made an investment with a bank. The return on the investment was that the bank ceded rights to dividends on listed shares to the taxpayer antecedently, that is before the entitlement to the dividends themselves arose. The question that arose is whether the dividend right constituted “an amount” that accrued to the taxpayer.

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This article first appeared on cliffedekkerhofmeyr.com.

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