‘Dividend–stripping’ Complexities and the Interaction with the ‘Rollover’ Relief Provisions

• Jurisdiction: South Africa
• DOI: 10.10520/ejc-btclq_v14_n4_a3
• Author: Michael Rudnicki Rudnicki,Dean Du Toit
• Pages: 22-29
• Date: 01 December 2023
• Published date: 01 December 2023
• Published By: Siber Ink

22 © Juta and Company (Pty) Ltd

‘Dividend–stripping’ Complexities

and the Interaction with the

‘Rollover’ Relief Provisions

MICHAEL RUDNICKI · DEAN DU TOIT*

ABSTRACT

The legislative rules relating to ‘dividend-stripping’ are complex and ever-

evolving. This article seeks to examine the more complex aspects of those

rules, particularly as they relate to the anti-avoidance elements of the legisla-

tion. The simplest way to explain the application of these rules is to illustrate

their application with concrete examples.

Prior to the application of the dividend-stripping rules it was relatively easy

to escape tax on share exits, whereby a purchaser subscribed for shares in a

target company and the target company repurchased the sellers’ shares free

of tax by way of a ‘return of capital’ and/or a dividend distribution.

The article deals with the rules as they apply in relation to (a) deferral trans-

actions; and (b) ‘clawback’ transactions. The former transactions are excluded

from the dividend-stripping rules and the latter are brought into the dividend-

stripping rules.

Deferral transactions escape the application of the dividend-stripping rules.

These transactions include transactions covered by the roll-over relief provi-

sions contained in sections 41 to 47 of the Income Tax Act, 1962 (‘the Act’).

‘Extraordinary dividends’ are recharacterized in the Act for tax purposes.

These are dividends that arise within 18 months of a sale of shares transaction,

or arise in respect of a sale of shares and exceed 15% of the value of shares at

the date of sale or 18 months prior thereto, whichever is the higher.

A distribution of shares by a company in anticipation of the liquidation of

the company (section47 of the Act) will escape the dividend stripping rules.

The recipient company of distributions from the liquidating company will

also escape the dividend-stripping rules, as distributions derived by section 47

(liquidation distributions) and section 46 (unbundling transactions) are excluded

from ‘extraordinary dividends’. So too does section 47 of the Act exempt from

tax the disposal by a company of shares in the liquidating company.

The ‘clawback’ rules work as follows:

• Dividends derived by a company that disposes of shares to another company

in terms of the rollover relief rules, other than a section 46 unbundling, will

form part of the proceeds for capital gains tax (‘CGT’) purposes in the hands

of the company disposing of these shares to third parties.

• A similar provision will apply to dividends declared by one company to

another company (‘old shares’) where the shares in the declaring company

are sold under section 42 of the Act (asset-for-share transactions) to a new

company which issues shares to the disposing company (‘new shares’) and

the disposing company sells such new shares to a third person. The dividends

declared on the old shares will form part of the proceeds for CGT purposes in

the hands of the company disposing of these shares to third parties.

*

Michael Rudnicki (Executive, Tax) and Dean du Toit (Senior Associate, Tax) — Bowmans.