WHAT TO DO WHEN DECLARING A DIVIDEND

The Companies Act and Income Tax Act regulate the declaration of dividends. We often find that clients are not aware of the requirements in terms of these Acts and the potential problems that can arise from the non-compliance thereof.

The requirements when declaring a dividend are:

A dividend can only be issued declared out of retained income.

When we perform the audit after year end we sometimes find clients have withdrawn dividends during the year, however due to lack of reserves this is not permitted. It can have a number of tax and legal implications.

The Companies Act requires a signed Resolution and a Solvency and Liquidity Test to be performed and documented prior to the dividend declaration,

Failure to comply timeously can also have legal implications.

Dividends Tax is payable on or before the last day of the month following the month in which the dividend was paid.

We often only become aware of the dividend when we perform the audit. This is after the payment due date has passed and results in interest due to late payment of dividends tax.

Dividend declarations to SARS are required to be submitted regardless of there being no tax payable on the transaction.

Client often assume that, because there is no tax payable, then the transaction need not be declared. All dividends must be declared.

Debit loan accounts may be deemed dividends for SARS.

Clients often draw out cash without considering whether it meets the definition of a dividend. This results in a debit loan account that then needs to be converted to a dividend at year end.

At Lucro we will prepare all these documents and submissions on your behalf.

However, it is imperative that you inform us before the dividends are declared, so we can ensure compliance with the various Acts.

We also urge you, in advance of a financial year end, to consider whether there may have been a deemed dividend during the financial year. This may attract dividends tax.  Should this be the case it is best to ensure we declare the dividend before the year end to avoid penalties.

Please contact Liza Wood on lizaw@lucro.co.za should you have any questions about this.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)