Dividends or Danger? How to Navigate Payouts Without Triggering Tax Trouble

27 May

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Dividends are more than just profit distributions—they’re a minefield of tax definitions, compliance hurdles, and strategic planning opportunities. Missteps don’t just cost money; they can trigger SARS penalties or missed opportunities to optimise tax.

If you’re advising clients on business structures, shareholder payouts, or capital strategies, a clear grasp of dividends tax is essential. This article offers practical guidance to help you protect your clients—and their profits.

What Is a Dividend, Really?

Depending on the context, a dividend can mean different things:

In accounting, it’s a distribution of retained earnings to shareholders.
Under company law, the Companies Act (2008) refers to broader “distributions”, which include dividends, capital repayments, and share buybacks.
For SARS, a dividend is any amount or value transferred by a resident company to a person, because they hold a share in the company. This includes:

Cash distributions
Non-cash transfers (dividends in specie)
Bonus shares
Loans with no or low interest to shareholders (deemed dividends)

Flowchart: Is It a Dividend or Not?

Not Everything Is a Dividend

While many company payments look like dividends, some are not—if structured and documented properly.

Example:

Common exclusions from dividends tax include:

Capital repayments drawn from Contributed Tax Capital (CTC)
Bonus (capitalisation) shares
Certain listed share buybacks (if done per JSE rules)
Dividends paid to South African resident companies, approved retirement funds, or public benefit organisations
Foreign dividends already taxed offshore (with proper documentation)

Effective Tax Rate: It’s Not Just 27%

Many clients mistakenly believe companies only pay 27% tax. But if profits are distributed, dividends tax of 20% applies—raising the total effective tax rate.

Example:

Greenvale Holdings earns a profit of R1 million. After paying 27% corporate tax (R270,000), the remaining R730,000 is distributed to shareholders. SARS then levies a 20% dividends tax on that distribution—an additional R146,000 in tax.
In total, the company and its shareholders pay R416,000 in tax, translating to an effective tax rate of 41.6%.

This illustrates the need for careful tax planning, especially when advising sole proprietors considering incorporating.

Planning Tools: CTC, Salaries, and Hybrid Models

Strategic structuring can reduce tax exposure and maximise shareholder value.

1) Use of CTC

If a company distributes capital originally received in exchange for shares (CTC), and the board passes a resolution explicitly stating the payment is a reduction in CTC, then it is not treated as a dividend.

Example:

Blue Horizon (Pty) Ltd wants to buy back shares from one of its founders, who invested R1 million during start-up. If the company fails to pass a resolution declaring the payment a CTC reduction, SARS will treat the R1 million as a dividend—and tax it at 20%. By documenting the CTC reduction properly, they avoid a R200,000 tax liability.

2) Hybrid Income Strategy

A blended approach using salaries and dividends is often more tax efficient.

Example:

MetroFix Solutions, a small consulting firm, earns R500,000 in annual profit. The sole shareholder, Thabo, takes a moderate salary of R250,000 to utilise lower personal tax brackets and then receives a dividend for the remaining R250,000. This approach avoids excessive PAYE while deferring some dividends tax.

Dividends in Specie: Tax Applies, Even Without Cash

Dividends aren’t limited to cash. If a company gives assets—such as vehicles or property—to shareholders, this is a dividend in specie, and it attracts dividends tax at 20%, based on the asset’s market value.

Example:

Oakline Interiors transfers ownership of a delivery van (valued at R300,000) to a shareholder as a “thank you” for support. Although no money changes hands, SARS sees this as a dividend. The company must pay R60,000 (20%) in dividends tax to SARS.

Note: With dividends in specie, the company pays the tax—not the shareholder.

Deemed Dividends: Watch the Shareholder Loans

If a company gives a shareholder a low- or no-interest loan, SARS may treat the interest benefit as a “deemed dividend in specie”.

Example:

Axis Dynamics loans R2 million to its director without charging interest. SARS’ official benchmark rate is 9%, meaning the company should have earned R180,000 in interest. The foregone interest is deemed a dividend, and Axis Dynamics must pay R36,000 in dividends tax (20% of R180,000), even though no dividend was declared.

The tax is triggered at the end of the company’s financial year.

Tip: Charging interest at or above SARS’ official rate (repo + 1%) avoids this.

Foreign Shareholders and Treaty Relief

Foreign investors may be eligible for reduced dividends tax (e.g., 5% or 10%) under Double Tax Agreements (DTAs)—but only if they submit declarations before payment.

Example:

SunEnergy SA pays R1 million in dividends to a UK-based investor holding 15% of its shares. The DTA allows a 5% tax rate—but because the investor didn’t submit the declaration and undertaking in time, SARS applies the full 20% rate. This results in a R150,000 excess tax that could have been avoided with timely paperwork.

Filing & Payment Deadlines

**Example:**
**ClearPoint Ltd** declares a dividend on 15 June, with payment scheduled for 5 July. Dividends tax is triggered on 5 July, and payment must reach SARS by 31 July. If ClearPoint misses the deadline, penalties and interest may apply.

Dividends Tax Compliance Checklist

Before making a distribution:

Is the payout made in respect of a share?
Have you classified it correctly (dividend, CTC, loan)?
Have you considered available exemptions or treaty relief?
Are signed declarations and undertakings in place?
Is the rate correct (20%, 5%, or exempt)?
Have DT002 returns been submitted and tax paid on time?
Are you within the 3-year window for any refund claim?

SARS Anti-Avoidance Watchlist

SARS monitors:

Temporary share transfers to PBOs or tax-exempt entities
Loans disguised as dividends or vice versa
Sudden ownership changes prior to dividend events

Example:

EagleStream Ltd temporarily cedes dividend rights to a charitable trust before payment to avoid tax. SARS views this as tax avoidance. The original shareholder may still be liable for 20% dividends tax.