The announcement of a 15% dividend withholding tax came as a shock to all investors earning dividends, despite Treasury’s claims that it should have been expected. The rate came in 50% higher than market expectations and there was very little warning in previous budgets as to any increase, let alone the quantum of the increase. If one looks that the revenue projections in the Medium Term Budget Policy statement issued in October 2011, it is clear that at that stage the dividend tax was expected to be in line with the 10% secondary tax on companies which it is replacing.

This higher dividend tax combined with a 33.3% increase in capital gains tax appears to have been a last minute grab for revenue. While the Finance Minister dismissed concerns about these rates, stating that they are not as high as other countries, it is the lack of warning and the quantum of the increase that is the issue. Treasury should have warned investors in the Medium Term Budget that these taxes were increasing and that they would be phased in over two or three years in order to allow for financial planning.

These taxes do not only affect “the rich”, take my mother as a case in point:

She is a 73 year old widow and receives around R5000 a month from my late father’s pension. She supplements this with income from a share portfolio – a grand amount of R7000 per month. The portfolio is structured to produce income whilst also providing an inflation hedge through investments in growth assets. Therefore the income she earns is a mixture of interest and dividends.

We are still to do the tax calculation, but what we do know is that she will be paying 50% more tax on her dividend income than expected – a substantial increase for a pensioner who is already facing an inflation rate higher than the national average due to rising medical and transport costs as well as higher electricity prices.

Perhaps because National Treasury deems dividend tax only to affect the “rich” it has, in this budget, not given any tax exemption threshold as is the case for example with interest income, which leaves my mother very little room to maneuver.

There are many pensioners like my mother that will be affected, especially for many women of her era who as housewives did not save into retirement vehicles as there was no tax benefit.

There are also many pensioners who find their retirement funds insufficient and are forced to sell their properties to create capital to provide an income in a discretionary investment vehicle. There are few pensioners who do not supplement their meager incomes outside of a retirement structure.

For those who have saved within a retirement vehicle the move from STC to dividend tax will actually create a financial boost as the companies will pass on the tax saving to the investor who will not be taxed within the structure, effectively boosting their dividend income by 10%.

However this benefit to retirement funds is little solace to the many pensioners surviving on income derived outside of such a structure, many of whom will be women.

Perhaps this is one of those “unintended” consequences and Treasury will, on reflection, at least afford those pensioners receiving meager incomes from their investments some relief in respect of this new tax.

This article by Maya Fisher-French first appeared in Mail&Guardian