Dividends in specie : the granting of services or the right of use of assets

• Date: 20 August 2019
• Record Number: dejure_v52_n2_a14
• Author: Rudie Nel,Michael Kok
• DOI: 10.10520/EJC-17a611078a
• Pages: 221-241
• Published date: 20 August 2019

Dividends in specie: the granting of services or the right of use of assets 221

Dividends

in specie

: the granting of

services or the right of use of assets

Michael Kok

BAcc (Hons), MAcc Taxation, Chartered Accountant (SA), Manager, PwC

Rudie Nel

BCom Accounting (Hons), MCom Taxation, Chartered Accountant (SA), Senior

lecturer, School of Accountancy, Stellenbosch University

SUMMARY

Dividends in specie are not defined by the Income Tax Act, which could

result in uncertainty whether the granting of services or the right of use of

assets to shareholders would be included in the ambit thereof. The

uncertainty could result in the opportunity for dividends tax to be avoided

and could also result in applicable deductions, claimed by the declaring

company, not being recouped for tax purposes. This article investigated

whether the granting of services or the right of use of assets to

shareholders would constitute dividends in specie for purposes of the

Income Tax Act by considering the South African perspective as well as

guidance based on international practices. The article submits that a broad

interpretation of the meaning of “dividend” and “in specie” in the Income

Tax Act supports the granting of services or the right of use of assets as

constituting dividends in specie. Furthermore, the context of the provisions

contained in the Income Tax Act considered in this article, does not

indicate findings contrary to the broad interpretation of the meaning of

“dividend” and “in specie”. The guidance obtained from investigating

international practices of selected countries also indicated that the

granting of services or the right of use of assets constitute dividends or

shareholder benefits on which shareholders are taxed. This article

concludes that the granting of services or the right of use of assets would

constitute dividends in specie and that the specific guidance on the

valuation of such benefits in terms of the Seventh Schedule to the Income

Tax Act, could possibly be extended to the application in the context of

dividends tax.

1Introduction

A dividend in specie has been described as any dividend other than in the

form of cash,1 and considered viable if declaring company is facing

liquidity problems or the distribution of an asset instead of cash would

make economic sense.2 Common forms of known dividends in specie

1 Stiglingh, Koekemoer, Van Heerden, Wilcocks, De Swardt & Van der Zwan

Silke: South African income tax (2018) 664.

2 Investopedia 2018 In specie available at https://www.investopedia.com/

terms/i/in_specie.asp (accessed 2018-01-31).

How to cite: Kok & Nel ‘Dividends in specie: the granting of services or the right of use of assets’ 2019 De Jure

Law Journal 221-241

http://dx.doi.org/10.17159/2225-7160/2019/v52a14

222 2019 De Jure Law Journal

include property, stock, scrip, and liquidating dividends.3 Companies

could, however, also distribute other forms of property to their

shareholders, including perks and benefits associated with their

shareholding, which give them the right to such property, as well as

discounts in respect of services.4 Dividends tax is levied in respect of

dividends declared and paid by a company as defined in terms of section

1 of the Income Tax Act 58 of 1962 (hereafter referred to as the ITA) and

section 64E(2) regulates the tax treatment for distributions other than in

specie distributions and asset in specie distributions. Two types of

dividends – cash and dividends in specie – are accordingly regulated by

the ITA and are treated differently for purposes of dividends tax in terms

of their valuation, timing, and liability for the payment of the dividends

tax.

The fact that dividends in specie contemplated in section 64F of the

ITA are not defined by the ITA gives rise to uncertainty as to what could

possibly fall within its ambit. Ambiguity could also arise by the fact that

the ITA refers to other terms which could also be conceived as dividends

in specie, being “distribution in specie,”5 or “asset in specie”.6 Current

guidance issued by the SARS in respect of dividends tax only

distinguishes between financial instruments, movable or immovable

property, and deemed dividends in respect of low-interest loans to

certain shareholders.7 No current guidance is provided in respect of the

granting of services or right of use of assets as dividends in specie. Under

the dividends tax regime, reliance is placed on the wide definition of

“dividend” to prevent avoidance of dividends tax, whereas, specific

examples of deemed dividends were provided under the STC regime in

order to prevent avoidance of dividends tax by structuring distributions

in a manner other than a dividend.8 A company could therefore grant

services or the right of use of assets to shareholders instead of a cash

dividend under the dividends tax regime, in which case uncertainty could

arise regarding whether or not these would constitute dividends in specie.

The lack of guidance under the dividends tax regime could consequently

result in incorrect interpretation and application in respect of dividends

in specie. Uncertainty regarding aspects such as how the revenue

authorities will treat a certain transaction, or how and by when the

legislator will introduce new legislation, or amend existing legislation,

may have a profound impact on the economy of a country.9 One of the

canons of a good tax system is also that the tax system should contain

3 Accounting Tools 2018 Types of dividends in specie available at htt p://

www.accountingtools.com/types-of-dividends (accessed 2018-01-31).

4 The Share Centre 2018 Shareholder perks available at https://www.share.

com/find-investments/shares/shareholder-perks/ (accessed 2018-01-31).

5 Para 75 of the Eighth Schedule.

6 S 10B(2)(d) and S 64EA.

7SARS Comprehensive guide to dividends tax (Issue 2) (2017) 62.

8 Mazansky “South Africa: New rules for tax on dividends (domestic and

foreign) and other company distributions” 2012 Bulletin for International

Ta xa t i o n 172.

9 Stiglingh et al supra n 1 at 6.