How to declare interest and dividends

Published Aug 30, 2014

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Dividends earned on the shares of South African-resident companies became subject to a tax of 15 percent on April 1, 2012, but companies that pay these dividends must withhold the tax on your behalf.

The way in which foreign interest and foreign dividends are taxed was changed from March 1, 2012. Until then, the first R3 700 of foreign interest and/or dividends was exempt from tax, but this exemption fell away from the start of the 2012/13 tax year. Foreign interest is fully taxable, while foreign dividends are taxed at a maximum effective rate of 15 percent.

You may be wondering what you need to declare on your tax return when it comes to the local and foreign dividends you have earned.

South African tax residents are taxed on their worldwide income, which creates the potential for foreign income to be taxed both in South Africa and in the country where it was earned. In order to combat double taxation, the Income Tax Act provides for a tax credit on foreign taxes levied on foreign income earned by South African tax residents. The credit is limited to the maximum of the tax in South Africa. In effect, South African tax is initially calculated on all the income earned by the taxpayer, whether it was earned in South Africa or a foreign country. Thereafter, the amount of tax paid overseas on the foreign income is subtracted from the South African income tax.

However, if South Africa has signed a double-taxation agreement with the foreign country in which the company is taxed, it may be that the income will be taxed only in the foreign country.

A dividend includes any amount transferred by a South African company to a person in respect of any share in that company, regardless of whether the amount is transferred by way of a distribution or as consideration for the acquisition of a share in that company (share repurchase or buy-back), less any part that constitutes a return of capital or an issue of shares, as well as certain types of share buy-backs by JSE-listed companies.

The income that a South African collective investment scheme (CIS) distributes to its unit holders keeps its underlying form for tax purposes. Accordingly, you, as a unit-holder, will be advised of the nature of the income that makes up the distribution, which could be a combination of local interest and dividends and foreign interest and dividends.

Some financial services companies make it easy for you to complete your income tax return by putting SARS source codes on their IT3(b) advice statements that tell in which fields on the return you must declare foreign interest and dividends. But others send out IT3(b)s that list various interest and dividend payments, as well as taxes paid on your behalf, without providing codes and without informing you which amounts you should declare. Personal Finance asked the South African Institute of Tax Practitioners to clarify which types of income you need to declare – and where on your return you should declare them.

Getting started

On the first page of your electronic return, you will be asked “Did you receive income from interest (local and foreign) and/or taxable foreign dividends?” If you did, click on “Y”, and the wizard will generate the “Investment income” section of the return. If your IT3(b) states that you received dividends from a foreign company that is listed on both the JSE and a foreign stock exchange, the wizard must create a section called “Amounts considered non-taxable”. For the wizard to do this, answer “yes” to the question “Did you receive any income that you consider non-taxable?”.

Local dividends

With effect from April 1, 2012, a dividends tax of 15 percent is required to be withheld in respect of dividends from South African-resident companies, as well as dividends from foreign companies listed on the JSE. The withholding tax is paid on your behalf by the company in which you own shares or the CIS manager.

You must disclose the total dividends paid by South African companies in the field “Exempt local and foreign dividends” in the section of the return headed “Amounts considered non-taxable”. However, you do not declare the withholding tax paid on your behalf.

Foreign interest

Your IT3(b) may disclose the foreign interest income you have earned, followed by an amount described as “Tax paid – foreign”. This refers to the tax deducted from the interest earned from an investment made in a foreign country. You should declare the total foreign interest income earned in the “Foreign interest” field (code 4218) and the “Tax paid – foreign” amount in the field “Foreign tax credits on foreign interest” (code 4113).

Foreign dividends

A similar principle applies to foreign dividends. If your IT3(b) discloses dividend earnings described as “Foreign – taxed”, enter this amount in the field “Gross foreign dividends subject to normal SA tax” (code 4216). The amount of “Tax paid – foreign” should be entered in the field below it, “Foreign tax credits on such foreign dividends” (code 4112).

Dividends from dual-listed foreign companies

Your IT3(b) may also disclose dividends earned by foreign companies that are listed on both a foreign stock exchange and the JSE. This amount may be described as “Foreign (dual-listed)”. These dividends, assuming they are paid in cash, are exempt from income tax in South Africa.

Note, that although such dividends are technically within the definition of “exempt income”, they are still subject to the dividends withholding tax of 15 percent, which will have been paid on your behalf. This amount must be disclosed in the “Amounts considered non-taxable” section of the return, in the field called “Exempt local and foreign dividends”.

The IT3(b) may also disclose the tax levied by a foreign country in respect of the dividends from foreign companies that are listed on the JSE and a foreign stock exchange. This amount may be described as “Tax paid – foreign (dual-listed)”. Effectively, these dividends are treated like local dividends and there are no South African tax credits on the amount. Therefore you do not declare it on your return.

eFILING QUESTIONS AND ANSWERS

The purpose of eFiling is to enable taxpayers to complete their tax returns themselves – unless, perhaps, their financial affairs are complex. But you may be scratching your head over where exactly to declare certain types of income or claim some deductions.

What qualifies as “foreign services rendered”?

The wizard on the first page of the tax return asks: “Did you receive remuneration for foreign services rendered?” What type of remuneration falls under “foreign services”? If I am resident in South Africa and do work for an entity or individual located overseas, am I rendering a “foreign service”?

SA Institute of Tax Practitioners: “Foreign services rendered” means services that are physically rendered outside South Africa, so where you earn income from a client situated overseas and you render such services in South Africa, this will not be considered “foreign services rendered”. Your physical location as you render the services determines whether they will be classified as local or foreign services rendered. In this respect, SARS will require documentary evidence that you did, in fact, leave South Africa to render the service.

Declaring dividends

The wizard asks “Did you receive exempt local and/or foreign dividend income?” I assumed that I must answer “yes” to this question to declare my local dividends, on which tax has been paid on my behalf. But the IT3(b) certificate sent to me by one asset manager states that I must declare gross local dividends by answering “yes” to the question “Did you receive any income that you consider non-taxable?”, which is under the heading “Amounts considered non-taxable”. Which question must I answer?

Sait: It does not matter if you answer “yes” to either or both of the two questions, because the result will be the same: the return will be populated with a section headed “Amounts considered non-taxable”, which contains the field “Exempt local and foreign dividends”.

Donations from family members

Where on the tax return should one declare donations received from family members? Should one tick “Y” to the question “Did you receive any income that you consider non-taxable?” or to the question “Did you receive any receipts or accruals not addressed by the previous questions but excluding amounts that you consider non-taxable?”

Sait: A donation is an amount classified as “of a capital nature” for income tax purposes. Amounts that are of a capital nature do not qualify as gross income. Gross income is the starting point in determining whether an amount received by a person will potentially be subject to income tax. Furthermore, the amount was not received by virtue of a disposal of an asset, so the donation will not be subject to capital gains tax (CGT). As the donation received from family members is not subject to income tax or CGT, it is not taxable. Therefore, a donation should be declared by answering “yes” to the question “Did you receive any income that you consider non-taxable?”. If you tick “Y” to that question, the return will have a section headed “Amounts considered non-taxable” where you can insert the amount received as a donation.

Submission of supporting documentation

My tax affairs are relatively simple: I receive a salary and qualify for the normal deductions (occupational retirement fund and medical scheme contributions). I earn some investment income and contribute to two retirement annuities. For years, I received a refund from SARS without question. But for the past two years, SARS has required that I submit all my supporting documentation before it will grant the refund indicated on my assessment. Is it now the standard policy of SARS not to pay refunds without checking taxpayers’ supporting documentation?

Sait: There are instances where SARS will pay a refund without requesting a taxpayer’s supporting documentation. However, where SARS does want to audit or verify the refund by requesting supporting documentation, it is entitled in terms of the Tax Administration Act not to authorise a refund until finalisation of the verification or audit. There are various risk factors that are used by SARS to determine whose supporting documents they will request to audit or verify, so we cannot comment whether or not it is standard policy.

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