New anti-avoidance amendment may render dividends taxable!

Category: Tax

01 October 2014  |  by Arno Goebel

Changes to the tax legislation announced in the Budget-Speech include a brand new anti-avoidance provision which may have nasty consequences for Trusts holding shares in private companies where a beneficiary of the Trust is also an office holder (e.g. director) or employee of such company.

The new provision makes a dividend paid by a company to any of its office holders or employees fully taxable in their hands if it is paid for services rendered or to be rendered to the company by such office holder or employee. This means that any Trust holding shares in a company where a beneficiary is also an office holder or employee of the company will be affected by this provision, potentially rendering the dividend declared and distributed to the beneficiary taxable in such beneficiary’s hands.

It is important to remember that this is an anti-avoidance provision aimed at addressing aggressive tax structures that are designed specifically to change the nature of payments and thus achieve a tax advantage. Therefore, if the office holder or employee is being paid a proper market-related salary by the company, then any dividend received by such office holder or employee in his or her capacity as beneficiary will be exempt from tax.

Note that the exemption still applies where the dividend is not paid as part of a ‘salary sacrifice’ scheme aimed at reducing the office holder or employee’s remuneration in return for a dividend payment, which will achieve a tax advantage where the beneficiary is in the top marginal tax bracket. On the negative side, the beneficiary could end up paying normal tax on the dividend received without the company getting the benefit of a deduction for payments made for services rendered.

Review your client’s Trust structures and red-flag those Trusts that hold shares in private companies and ask three questions:

  • is a beneficiary an office holder or employee, typically a director, of the company whose shares are held by the Trust?
  • is the beneficiary receiving dividends via the Trust declared by the company?
  • is the beneficiary paid a market related salary by the company for services rendered as an office holder or employee?

If your client answers yes to the first two questions and no to the the last question, then you need to advise them to get professional advice.