First of all, you can calculate the partial exemption using the following formula:
A = B x C
A = the amount of the foreign dividend that's exempt from income tax
B = the ratio of exemption –
• For natural person, deceased estate, insolvent estate or a trust, this is 25/40
• For a company, or any other taxpayer not mentioned in the previous bullet, this is 13/28
C = The total foreign dividends received during the current tax year that are not fully exempt.
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Let's look at some examples applying this formula:
Example 1 – Natural person
Gary owns a number of shares in small companies across the African continent. None of the companies are listed. Gary doesn't hold more than 10% of the equity shares in any of these companies either. For the 2015 tax year, Gary receives R2 000 000 in foreign dividends.
Gary earns other income of R500 000 and has no deductions.
The exempt portion is: R2 000 000 x 25/40 = R1 250 000. Taxable foreign dividends at the normal rate is thus R750 000.
Let's work out Gary's taxable income for the 2015 tax year:
• Other income R500 000
• Foreign dividends R2 000 000
• Less: Exempt foreign dividends (R1 250 000)
• Taxable income R1 250 000
What's the effective tax rate on the foreign dividends then?
Keep in mind that if Section 10B wasn't around, Gary would have to pay R2 000 000 x 40% = R800 000 in tax. But since we do have the exemption, Gary only has to pay R750 000 x 40% = R300 000. The effective tax rate works out nicely to be… exactly 15% which (not coincidentally) is the same rate as our local DWT.
The even better news is that if Gary were in a lower tax bracket, below 40%, he'd have to pay less tax on his foreign dividends than he does on his local dividends.
Example 2 – Local company
ShakaSure (Pty) Ltd holds shares in a number of Asian companies, and earns foreign dividends of R10 000 000 for the 2015 tax year. None of the full exemption criteria applies to any of the foreign dividends. If you apply the partial exemption calculation to the foreign dividends, the exempt portion will be R4 642 857 (R10 000 000 x 13/28), so the taxable portion is R5 357 143. SARS taxes ShakaSure at 28%, and pays income tax of R1 500 000. An effective rate of 15%, once again the same as local DW.