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28 Jun 2021
BY Magda Snyckers AND Michael Reifarth

Corporate actions: drip dividends

In the second instalment of our series on South African tax considerations arising for residents and non-residents resulting from corporate actions in respect of South African listed shares, we deal with drip dividends.

Drip dividends arise in respect of so-called dividend reinvestment plans. In this regard, shareholders reinvest cash dividends by acquiring shares in the payor of the dividend on the dividend payment date. In contrast to scrip dividends (which take the form of capitalisation shares issued by a company to its shareholders), the mechanics of a drip dividend programme entail two distinct steps, namely the declaration of a cash dividend and the investment of the cash amount in additional shares by the shareholder.

Receipt/accrual of drip dividends

The starting point is to consider whether the amount received or accrued falls within “gross income”, as defined in the Income Tax Act, 1962 (“Act”). Paragraph (k) of the gross income definition specifically includes any amount received or accrued by way of a “dividend”. The amount to which the shareholder becomes entitled should fall within the scope of the definition of a dividend.

Although a shareholder that opts to partake in a drip dividend programme will ultimately hold additional shares in the underlying company, the mechanics do not result in the shareholder being entitled to a distribution of shares in that company (as is the case with scrip dividends), but rather the accrual of a cash dividend which will then be applied to acquire shares in the issuing company at a predetermined price.

On this basis, the amount of the dividend should be included in the gross income of both resident and non-resident taxpayers. These dividends may qualify for the exemption for income tax contained in section 10(1)(k)(i) of the Act.

However, it should be considered whether any of the exclusions thereto apply (for example, if the dividend is distributed to a resident shareholder by a REIT, if the dividend accrues to a company in consequence of certain cessions of the right to that dividend, or if the dividend accrues to a resident or non-resident shareholder in respect of a borrowed share).

If the exemption does not apply, the taxpayer would need to determine whether any expenditure incurred in the production of the drip dividend may be claimed as a deduction against the amount included in gross income. This is done in terms of the general deduction formula.

Since the distribution should constitute a “dividend”, the dividends tax provisions contained in the Act would apply and resident and non-resident taxpayers would be required to determine the dividends tax implications arising regarding their particular facts and circumstances. It is noted that a drip dividend that does not qualify for an exemption from income tax should be exempt from dividends tax and vice versa, ie a drip dividend that qualifies for an exemption from income tax should be subject to dividends tax.

Acquisition of drip dividend shares

The second leg of the drip dividend programme entails the subscription for or acquisition of shares by the shareholder at a predetermined price. The amount payable by the shareholder for the shares should be taken into account:

  • as the cost thereof for purposes of section 22 of the Act (where the shares will be held as trading stock), provided the requirements of the general deduction formula contained in section 11(a) read with section 23(g) of the Act are met; and
  • for purposes of paragraph 20 of the Eighth Schedule to the Act.

In establishing the cost of such shares it is noted that the provisions of section 40C of the Act, which operate to deem the expenditure incurred by a taxpayer in acquiring scrip dividends to be nil, would not apply to drip dividends.

From a securities transfer tax (“STT”) perspective, no STT liability should arise in respect of a drip dividend programme where new shares are issued by the underlying company to the shareholder. However, STT implications may arise where existing shares are transferred to the shareholder.

Disposal of drip dividend shares

It is also necessary to consider the tax impact arising from the disposal of the shares acquired as part of a drip dividend programme.

For resident taxpayers, any future disposal of shares received as part of a drip dividend programme will lead to income tax or capital gains tax (“CGT”) implications, to be determined with reference to the proceeds in respect of the disposal of the shares and the expenditure incurred in acquiring such shares.

From the perspective of a non-resident, the disposal of shares received as drip 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, CGT 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.

Drip dividends vs scrip dividends

Although the ultimate economic result for a shareholder receiving scrip dividends or opting to receive drip dividends may be similar, the South African tax implications arising in respect of these distributions are quite different.

The income tax, dividends tax and CGT implications arising for parties who acquire shares as part of a drip dividend programme require careful consideration, with reference to the intention with which the shareholder has acquired the underlying shares in terms of which drip dividends are payable as well as the particular facts and circumstances of such shareholder.


Magda Snyckers

Tax | Executive

+27 83 289 3885


Michael Reifarth

Tax | Executive

+27 83 288 1556