Latest / Tax Break: South African tax for professionals / Dividend or donation?

Transcript

Dividend or donation? · Tax Break: South African tax for professionals

• 0:11
  Company makes payments to a related party of its shareholder
• 0:15
  and the company doesn't receive anything in exchange from this
• 0:18
  related party. Are these payments dividends or
• 0:22
  are they donations? This is the question I'll be
• 0:25
  discussing in this first episode of Tax Break for 2026.
• 0:29
  I hope that you are all well rested and ready to see what the
• 0:32
  year holds in store for us as tax professionals and
• 0:36
  practitioners in South Africa. Before I delve into the
• 0:39
  question, I want to ask you if you would be willing to share
• 0:43
  this episode with another tax practitioner or professional who
• 0:47
  you also think might be interested in listening to the
• 0:50
  podcast. So maybe to share with you with
• 0:54
  your help. This podcast has grown too.
• 0:57
  We are very close to 1000 subscribers and I think even
• 1:01
  more regular listeners who are not necessarily subscribers.
• 1:05
  So it would be very good if we if, if that trend can continue
• 1:10
  into 2026, right. So back to our scenario, a
• 1:14
  company has a shareholder, but it pays an amount not to their
• 1:18
  children, but to related party off the shoulder and the company
• 1:23
  doesn't receive any consideration back from the
• 1:26
  related person. The question is what is this
• 1:29
  amount? So this question is so the the
• 1:33
  this issue is not a new one. I've already covered it in a
• 1:36
  previous podcast. For those of you who are regular
• 1:39
  listeners, you can go back to episode 34 now in that in that
• 1:45
  episode, I looked at some of the commentary from Sarge and the
• 1:48
  National Treasury around this. So in this case, we're going to
• 1:52
  look at it a bit more practically in the context of a
• 1:55
  scenario in a recent ruling, so bonding private ruling 4 to 3
• 2:00
  that was issued by Sash in November.
• 2:05
  The facts of the, of the the that that we presented to search
• 2:10
  for purposes of the ruling is that the parties involved is a
• 2:13
  trade union. Now important.
• 2:16
  The trade union is exempt under section 101D Roman three of the
• 2:21
  Income Tax Act trust that was founded by the trade union and
• 2:27
  the company whose shares are held by the trust.
• 2:31
  So to maybe add a bit more colour to the to the picture,
• 2:36
  the the trust holds all the shares in the company.
• 2:39
  The the trade union as the founder is also of the trust, is
• 2:44
  also the sole beneficiary of the trust and this is a
• 2:48
  discretionary trust. So what the facts in the ruling
• 2:52
  suggest is that this structure was put in place to invest the
• 2:57
  trade unions surplus funds. So the principal object of the
• 3:01
  trust, amongst others is to apply the investment proceeds
• 3:05
  from the investments made by the company for the benefit of the
• 3:09
  trade union or its members. So the transaction that they
• 3:14
  approach such for with for a ruling is that the company now
• 3:18
  intends to pay annual amounts to the trade union to assist it to
• 3:24
  cover its operating costs. So there's going to be no
• 3:26
  consideration flowing back from the trade union to the company.
• 3:30
  And remember in this picture between the company and the
• 3:33
  trade union sits the trust, that's the shareholder of the
• 3:38
  company. So with all of these rulings,
• 3:42
  it's always good to think about what could the reason be why the
• 3:47
  parties requested the ruling. So the one reason I can think of
• 3:52
  is that if we look at the trade union, your once first instinct
• 3:56
  is to say, but it's exempt. So why does it matter whether
• 3:59
  it's a donation or a dividend that's being paid to it?
• 4:02
  But if you look at it a bit more closely, if it's a donation,
• 4:06
  there's an exemption for any donation made to an entity
• 4:10
  listed under Section 101D. So that exemption we find in
• 4:14
  Section 561-H. However, if we look at the
• 4:19
  dividends tax exemptions, that exemption only applies to
• 4:25
  Fidelity funds or indemnity funds in Section 101D Roman 3.
• 4:32
  So not all the entities listed there.
• 4:34
  And one of the entities that is they're not a Fidelity fund or
• 4:38
  an indemnity fund would be the trade union.
• 4:41
  So I suspect the one reason why it was necessary to to get the
• 4:45
  ruling is to if it's a dividend, it may not be exempt from
• 4:50
  dividends tax, but if it's a donation, it would be exempt
• 4:53
  from donations tax. Okay, So the question then is it
• 4:57
  the dividend, is it the donation?
• 4:59
  And I think the right place to start the discussion before we
• 5:03
  go and look at what's our ruled is to look at the definitions
• 5:07
  again. So if we look at the definition
• 5:09
  of a dividend in Section 1, it's any amount and in this specific
• 5:15
  exclusion for certain dividends arising from transfer pricing
• 5:19
  that we're not going to look at now.
• 5:21
  So it's any amount transferred or applied by a company that's a
• 5:25
  resident for the benefit or on behalf of any person.
• 5:29
  So it doesn't specifically say it's only the shareholder in
• 5:33
  respect of any share in that company.
• 5:36
  So if if it's paid by reason of the shareholding in the company,
• 5:43
  whether the amount is in transferred or blood by way of a
• 5:46
  distribution or as consideration for the company acquiring the
• 5:50
  share back from that person. And then the definition goes on
• 5:54
  with a few exclusions that are not relevant for now, right.
• 5:58
  So that's the dividend definition.
• 6:00
  And I think what's clear they from this definition, two
• 6:03
  things, one is that it this amount can be paid to any
• 6:07
  person, it's not limited to the shareholder only.
• 6:10
  And the second is it must be paid in respect of the share.
• 6:13
  So there must be a link between the payment and the the
• 6:19
  shareholding in the company, right?
• 6:21
  If we then contrast that to the definition of a donation.
• 6:24
  So that definition we find in Section 55, that definition
• 6:29
  states that the donation is any gratuitous disposal of property,
• 6:33
  including a gratuitous waiver or renunciation of a right.
• 6:37
  So what's the key difference between these two definitions?
• 6:41
  I think it really all comes down to the reason for the payment.
• 6:45
  If the payment is linked to shareholding, so that's the
• 6:49
  reason why this payment is being made, then we are into the
• 6:52
  definition of a dividend. If it's a gratuitous, if the
• 6:56
  motive for the payment is gratuitous, then you are looking
• 6:59
  at a donation. So in the earlier episode 34, I
• 7:05
  looked at the search and the National Treasury commentary we
• 7:09
  and and the conclusion was really that the same to to say,
• 7:14
  but if this linkage is there to the the shades of the company,
• 7:19
  then it's going to be a dividend.
• 7:20
  And in binding private ruling 4 to 3, Sarge consistently with
• 7:25
  this confirms that the payments will be considered dividends.
• 7:29
  They are not donations. So that's consistent with the
• 7:32
  commentary now interesting. And that might be the second
• 7:37
  reason why it was necessary to ask to to get the ruling in this
• 7:40
  case is that the commentary suggested that they could be
• 7:44
  scenarios where you've got the dividend and the donation.
• 7:47
  So the reason why that would happen, and you can listen to
• 7:50
  the earlier episode for that. But the dividend is the first
• 7:54
  flow, but the second the flow of value is that the shareholder
• 8:00
  tomb, the dividend would naturally accrue in some way
• 8:03
  also now transferred that that that amount to the the value of
• 8:09
  the dividend to someone else without getting something from
• 8:11
  them. So that second transfer is then
• 8:14
  the potential donation. Now, I think in this context of
• 8:19
  the trade union, the trust and the company, what makes it a bit
• 8:23
  different is that if that second transaction happens, that's
• 8:29
  arguably a distribution in a made in accordance with the
• 8:33
  trust deed and that wouldn't attract donations tax.
• 8:38
  So what's the take home message? I think a few things that you
• 8:41
  can consider. Firstly is that there is a
• 8:44
  presumption against a donation in law, this case law to that
• 8:48
  really says that it's not human nature to ordinarily part with
• 8:51
  something for no consideration. So if someone alleges that
• 8:55
  they've made a donation, it's for that person to prove that
• 8:59
  they've made a donation. What the ruling and then also
• 9:02
  the earlier commentary suggests, and it it it, it's a reminder
• 9:06
  for us, is that if there is a link between the recipient of
• 9:12
  the payment and the shareholder of the company, the reason for
• 9:16
  that payment is very likely the shareholding in the company, in
• 9:19
  which case the payment would be a dividend.
• 9:22
  So the mere fact that the payment goes to a person other
• 9:25
  than the shoulder is not sufficient to for it no longer
• 9:29
  to be a dividend. And then the Third Point to take
• 9:32
  home, as I've already said, is that the same transaction may in
• 9:37
  some circumstances also trigger a donation, depending on the
• 9:42
  facts and circumstances. That's that's for today's
• 9:46
  episode. I just want to remind you that
• 9:48
  the podcast is only for information purposes.
• 9:51
  It's not intended to be tax advice.
• 9:54
  Until next time, goodbye.