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22 Apr 2021
BY Magda Snyckers AND Michael Reifarth

Getting to grips with scrips

We will address, in a series of articles, the South African tax considerations arising for residents and non-residents in respect of various corporate actions regarding South African listed shares.

This article outlines certain relevant aspects in respect of scrip dividends.

Scrip dividends take the form of capitalisation shares issued by a company to its shareholders – in other words, the relevant company issues shares to its shareholders rather than declaring and making payment of a cash dividend.

 

RECEIPT/ACCRUAL OF SCRIP DIVIDENDS

The starting point for any person is to consider whether the value of a scrip dividend falls within its “gross income”.

The definition of “gross income” in the Income Tax Act, 1962 includes, in the case of a resident, the total amount, in cash or otherwise, received by or accrued to such resident, excluding receipts or accruals of a capital nature. In the case of a non-resident, an additional requirement is that such amount must be from a South African source.

Although paragraph (k) of the gross income definition specifically includes any amount received or accrued by way of a dividend, specifically excluded from the definition of a “dividend” contained in section 1 of the Act are amounts transferred or applied by a resident company in respect of any share in that company, where such amounts constitute shares in that company. Therefore, scrip dividends will not automatically be included in the gross income of a taxpayer in the way that cash dividends would.

Resident taxpayers will therefore include scrip dividends in their gross income in instances where the receipt or accrual is not of a capital nature. Non-residents will, in addition, need to be satisfied that such amount is from a South African source.

 

Capital or revenue?

The question of whether a receipt or accrual is of a capital nature is ultimately a question of fact dependent on the specific circumstances. Reference would need to be drawn from case law principles in determining the capital or revenue nature of amounts received or accrued by way of scrip dividends. In this regard, case law exists that supports the argument that the receipt or accrual of scrip dividends, depending on the facts, are of a capital nature. There are also non-binding indications that the South African Revenue Service is of the view that scrip dividends result in the receipt or accrual of a capital nature.

To the extent that the amount is of a capital nature, resident and non-resident taxpayers will not be required to include such amount in gross income.

However, the receipt or accrual of scrip dividends may constitute an amount which is not of a capital nature. In such cases, a resident will be required to include the amount of the scrip dividend in its gross income. This scenario may arise, for example, where the underlying shares held by the taxpayer form part of a transaction undertaken on a speculative basis or in a scheme of profit making.

 

Source?

As indicated above, non-residents will only be required to include scrip dividends in their gross income if such amounts are not of a capital nature and from a South African source. Since scrip dividends do not constitute “dividends” as defined, no statutory source rules exist to determine the source thereof and reference must be made to case law principles. This requires that the originating cause of the scrip dividend be determined. Some of the factors to be considered in determining the originating cause include determining the location where relevant activities (which give rise to the scrip dividends) are undertaken, the location where the capital of the non-resident is employed and whether the listed shares are issued by a South African resident company.

To the extent that the scrip dividends are not of a capital nature and sourced in South Africa, the scrip dividends will be subject to income tax in the hands of the non-resident and it will be necessary to consider if the non-resident is entitled to relief in terms of a double taxation agreement.   

  

DISPOSAL OF SHARES RECEIVED AS SCRIP DIVIDENDS

It is also necessary to consider the tax impact arising from the disposal of the shares received as scrip dividends.

In terms of section 40C of the Act, the expenditure incurred by a taxpayer in acquiring scrip dividends is deemed to be nil. For this reason, the tax implications arising from any future dealings in the shares received as scrip dividends by taxpayers requires a separate detailed analysis with reference to the gross income definition and the relevant capital gains tax (“CGT”) provisions.

For resident taxpayers, any future disposal of shares received as scrip dividends will lead to income tax or CGT implications be determined with reference to the proceeds in respect of the disposal of the shares. As set out above, in terms of section 40C of the Act the shares will be deemed to have an acquisition cost of nil and no deduction of, for example, the market value of the scrip dividends on the date of accrual thereof to the taxpayer will be permitted.

Notwithstanding a deemed acquisition cost of nil, from the perspective of a non-resident, the disposal of shares received as scrip dividends will only give rise to income tax implications where the disposal thereof is from a South African source in terms of the statutory source provisions. Furthermore, capital gains tax implications will only arise where the disposal of the shares falls within the scope of paragraph 2(1)(b) of the Eighth Schedule to the Act.

 

Magda Snyckers

Tax | Executive

msnyckers@ENSafrica.com

+27 83 289 3885

 

Michael Reifarth

Tax | Executive

mreifarth@ENSafrica.com

+27 83 288 1556