The Minister of Finance announced that the dividend withholding tax will be increased from 15% to 20% with effect from 22 February 2017. One of the main reasons for this increase appears to be to close the gap between the effective tax rate for individual company shareholders who earn more than R1.5m per annum, as their top marginal tax rate has now been increased to 45%. The situation before and after the budget can be illustrated as follows:
| Top marginal tax rate: local individuals | Effective tax rate on dividends: local shareholder | |
| Before the budget | 41% | 39.8% |
| After the budget | 45% | 42.4% |
This will mainly affect smaller companies whose shareholders can substitute between salaries and dividends. Listed and widely held larger companies have a variety of shareholders and the treatment of dividends differs for various categories of shareholders.
| Type of shareholder (of larger companies) | Withholding tax treatment |
| Retirement funds | Exempt |
| Unit trusts | Taxable |
| Non-residents in treaty countries | Reduced withholding rates apply, where applicable * |
*Lower rates generally apply to South Africa’s main providers of capital
Tax on retirement fund distributions are deferred until members exit or receive pensions and unit trusts rely mainly on capital growth, so the increase in withholding tax may not be a big disincentive for investors in these vehicles.
The effective tax rate affects shareholders of smaller companies disproportionately compared to other categories of investors. The increase may limit tax arbitrage between salaries and dividends. However, small businesses owners may now be at a disadvantage compared to institutional investors and foreign investors. There does not seem to be an easy middle road here from a policy perspective, but it is possible that the negative effect of this on small businesses may have been underestimated.