How you can avoid paying dividend withholding tax - and grow your portfolio faster

by , 22 September 2017

Every time you get paid a dividend you need to pay dividend withholding tax on it.

That means, if you own 10,000 shares in a company and it pays you a dividend of R1 a share, instead of receiving R10,000 in dividends your dividend withholding tax will be deducted first.

In the past it was 15%.

But since March 2017, dividend withholding tax has been increased and now sits at 20%.

That means, in the example above, you'd receive only R8,000 with the remaining R2,000 going towards dividend withholding tax.

But there is a way you can avoid dividend withholding tax altogether, and delay paying tax on your investment for a long time, and attracting lower taxes when you eventually pay…

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An easy way to avoid paying dividend withholding tax
 
So to avoid paying dividend withholding tax, there’s an easy solution.
 
A simple choice you need to make, but it requires you to make a ‘long-term’ investment. That means holding your shares longer than three years.
 
Let me explain…
 
Many companies these days offer you the choice between receiving a cash dividend, or receiving a ‘scrip distribution’.
 
That means you get shares in the company, instead of cash.
 
You don’t pay dividend withholding tax on these dividends. That means you have 20% more investment that can give you growth in the long run.
 
Here’s a cut out of the explanation from a recent SENS announcement in which a company declared a ‘scrip’ dividend:
A real world example of how your tax free dividend would work
 
One of my favourite companies, Santova, just declared a dividend.
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So, let’s say you bought 6,250 Santova shares at R3.20, it would’ve cost you R20,000.
 
If you choose to receive cash, you will receive R312.50 in dividends after dividend withholding tax.
 
If you choose to receive shares, you will receive 123 shares. Valued at R3.20, that’s a value of R393.60.
 
But here’s the kicker, I expect Santova’s share price to head towards R4.50 before end 2017.
 
If that happens, your 123 shares are worth R553.50. So your actual dividend could be 77% larger if you take the shares instead of the cash.
 
And remember – if you take the cash and you want to invest it, you will pay brokerage. The shares you receive in dividend form is free from brokerage. That saves you even more cash!
 
But remember, you will eventually pay tax on these shares when you sell them.
 
The positive is that it will be capital gains tax, which is at a lower rate than dividend withholding tax. If you’re in the top tax bracket it is 18% tax, if you are on a lower tax bracket it is less tax. And then there’s always your annual capital gains tax exclusion of R40,000 which can also lower the amount of tax you pay…
 
The big positive here is that you delay paying tax, whilst you get maximum growth.
 
So, make sure you instruct your broker to elect shares instead of cash dividends whenever a share you own gives you the choice.
 
Here’s to unleashing real value
Francois Joubert

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