Your retirement fund returns should be boosted when the secondary tax on companies (STC) becomes a dividend tax next year.
The removal of STC - a tax paid by companies on the dividends they declare - and its replacement with a lower dividend tax that shareholders will pay when they receive the dividends - was announced in last year's Budget.
The first step in phasing out STC occurred in October last year, when the tax was reduced from 12.5 percent to 10 percent.
The South African Revenue Service (SARS) announced this week that when the new dividend tax is introduced (a move that is expected by 2009), dividends paid to entities that are exempt from income tax will also be exempt from the new dividends tax.
Craig Aitchison, the head of Old Mutual Consultants and Actuaries, says the new tax system will give retirement funds a small boost.
He says it means your retirement savings will potentially earn higher dividends from equity investments. Medium-term average dividend yields on domestic equities are currently around 2.5 percent to three percent, and the removal of STC will mean a potential increase of 0.2 percent to 0.3 percent in equity returns.
Aitchison says this also provides further incentives for retirement fund members to stick to their equity exposure despite short-term volatility in equity markets.
Besides the boost for retirement savings, the removal of STC and its replacement with a dividend tax is unlikely to have any major impact on you as an investor.
You will not even be expected to pay the tax as it will be a withholding tax, which means companies will deduct the tax you owe on the dividends they pay you before they pay the dividends over to you.
At the end of the month in which the dividend is declared, the company will be expected to pay the tax over to the taxman.
The hold-up in implementing the second step in replacing STC with a dividend tax is that SARS has had to revise international tax treaties with a number of countries to ensure that shareholders in foreign countries are not taxed on the dividends paid by local companies in their home country as well as in South Africa.
The reason why SARS is phasing out STC is that most other countries have a dividend tax on shareholders rather than a tax on dividends paid by companies.
It has been difficult to explain the tax to foreign investors, and the addition of STC to the company tax rate has made South Africa's corporate tax rate appear uncompetitive.